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Reserve Bank of India: Functions and Working


The Reserve Bank of India, the nations central bank, began operations on April 01
, 1935. It was established with the objective of ensuring monetary stability and
operating the currency and credit system of the country to its advantage. Its f
unctions comprise monetary management, foreign exchange and reserves management,
government debt management, financial regulation and supervision, apart from cu
rrency management and acting as banker to the banks and to the Government. In ad
dition, from the beginning, the Reserve Bank has played an active developmental
role, particularly for the agriculture and rural sectors. Over the years, these
functions have evolved in tandem with national and global developments This book
aims to demystify the central bank by providing a simple account of the Reserve
Banks operations and the multidisciplinary nature of its functions. The Bank tod
ay focuses, among other things, on maintaining price and financial stability; en
suring credit flow to productive sectors of the economy; managing supply of good
currency notes within the country; and supervising and taking a lead in develop
ment of financial markets and institutions. The book serves to highlight how the
Reserve Banks decisions touch the daily lives of all Indians and help chart the
countrys economic and financial course. We hope that readers would find the book
, authored by the staff of the Bank, useful in getting a better appreciation of
the policies and concerns of the Reserve Bank.
Dr. J. Sadakkadulla Principal Reserve Bank Staff College Chennai

S. No. Chapters
Monetary Management
Issuer of Currency
Banker and Debt Manager to Government Banker to Banks
Financial Regul
ation and Supervision
Foreign Exchange Reserves Management
Foreign Exchang
e Management
Market Operations
Payment and Settlement Systems Develop
mental Role
Research and Data Dissemination
How Departments Work
Page No. 7 12 21 27 32 35 38 52 55 60 63 67 76 79
Chronology of Important Events in the History of the Bank
107 Annex - 1 P
ublications by the Reserve Bank Annex 2 List of Abbreviations
112 114

Index on Boxes
S. No. Name of the Box Item
Origins of the Reserve Bank of
Functions of the Reserve Bank Central Office Departments
y Policy Transmission
Currency Unit and Denomination Banker to Banks
Prudential Norms
Investment of Reserves Foreign Exchange Reserves Manag
ement: The RBIs Approach
Payment and Settlement System: Evolution and Initiative
Institutions to meet Needs of the Evolving Economy
Page No. 8 8 15
24 28 36 41 53 54 64 73
Improving Banking Services in Comparatively Backward States


The origins of the Reserve Bank of India can be traced to 1926, when the Royal C
ommission on Indian Currency and Finance also known as the Hilton-Young Commissi
on recommended the creation of a central bank for India to separate the control
of currency and credit from the Government and to augment banking facilities thr
oughout the country. The Reserve Bank of India Act of 1934 established the Reser
ve Bank and set in motion a series of actions culminating in the start of operat
ions in 1935. Since then, the Reserve Banks role and functions have undergone num
erous changes, as the nature of the Indian economy and financial sector changed.

Origins of the Reserve Bank of India

1926: The Royal Commission on Indian Cu
rrency and Finance recommended creation of a central bank for India.
1927: A
bill to give effect to the above recommendation was introduced in
the Leg
islative Assembly, but was later withdrawn due to lack of agreement
among v
arious sections of people.
1933: The White Paper on Indian Constitutional
Reforms recommended the
creation of a Reserve Bank. A fresh bill was in
troduced in the Legislative
1934: The Bill was passed and r
eceived the Governor Generals assent
1935: The Reserve Bank commenced operat
ions as Indias central bank on
April 1 as a private shareholders bank with a pa
id up capital of rupees five
crore (rupees fifty million).
1942: The Reser
ve Bank ceased to be the currency issuing authority of Burma
(now Myanmar).
1947: The Reserve Bank stopped acting as banker to the Government of
1948: The Reserve Bank stopped rendering central banking services to
1949: The Government of India nationalised the Reserve Bank under the
Reserve Bank (Transfer of Public Ownership) Act, 1948.
Box 1
Starting as a private shareholders bank, the Reserve Bank was nationalised in 194
9. It then assumed the responsibility to meet the aspirations of a newly indepen
dent country and its people. The Reserve Banks nationalisation aimed at achieving
coordination between the policies of the government and those of the central ba
Functions of the Reserve Bank The functions of the Reserve Bank today can be cat
egorised as follows:
Monetary policy
Regulation and supervision of t
he banking and non-banking financial
institutions, including credit informat
ion companies
Regulation of money, forex and government securities markets as
certain financial derivatives
Debt and cash management for Central an
d State Governments
Management of foreign exchange reserves
exchange managementcurrent and capital account management
Box 2 8

Banker to banks Banker to the Central and State Governments Oversight of the pay
ment and settlement systems Currency management Developmental role Research and
Continuity with Change The Preamble to the Reserve Bank of India Act, 1934 (the
Act), under which it was constituted, specifies its objective as to regulate the
issue of Bank notes and the keeping of reserves with a view to securing monetary
stability in India and generally to operate the currency and credit system of t
he country to its advantage. The objectives outlined in the Preamble hold good ev
en after 75 years. As evident from the multifaceted functions that the Reserve B
ank performs today, its role and priorities have, in the span of 75 years, chang
ed in tandem with changing national priorities and global developments. Essentia
lly, the Reserve Bank has demonstrated dynamism and flexibility to meet the requ
irements of an evolving economy. A core function of the Reserve Bank in the last
75 years has been the formulation and implementation of monetary policy with th
e objectives of maintaining price stability and ensuring adequate flow of credit
to productive sectors of the economy. To these was added, in more recent times,
the goal of maintaining financial stability. The objective of maintaining finan
cial stability has spanned its role from external account management to oversigh
t of banks and non-banking financial institutions as also of money, government s
ecurities and foreign exchange markets. The Reserve Bank designs and implements
the regulatory policy framework for banking and non-banking financial institutio
ns with the aim of providing people access to the banking system, protecting dep
ositors interest, and maintaining the overall health of the financial system. Its
function of regulating the commercial banking sector, which emerged with the en
actment of the Banking Regulation Act, 1949, has over time, expanded to cover ot
her entities. Thus, amendments to the Banking Regulation Act, 1949 brought coope
rative banks and regional rural banks under the Reserve Banks jurisdiction, while
amendments to the Reserve Bank of India Act saw development finance institution
s, non-banking financial companies 9

and primary dealers coming under its regulation, as these entities became import
ant players in the financial system and markets. Similarly, the global economic
uncertainties during and after the Second World War warranted conservation of sc
arce foreign exchange reserves by sovereign intervention and allocation. Initial
ly, the Reserve Bank carried out the regulation of foreign exchange transactions
under the Defence of India Rules, 1939 and later, under the Foreign Exchange Re
gulation Act of 1947. Over the years, as the economy matured, the role shifted f
rom foreign exchange regulation to foreign exchange management. Post-independenc
e, as the emerging nation tried to meet the aspirations of a large and diversifi
ed populace, the Reserve Bank, with its experience and expertise, was entrusted
with a variety of developmental roles, particularly in the field of credit deliv
ery. With the onset of economic planning in 1950-51, the Reserve Bank undertook
a variety of developmental functions to encourage savings and capital formation
and widen and deepen the agricultural and industrial credit set-up. Institution
building was a significant aspect of its role in the sixties and the seventies.
The strategy for nearly four decades placed emphasis on the state-induced or sta
te-supported developmental efforts. Subsequently, the role of the financial sect
or and financial markets was also given an explicit recognition in the developme
nt strategy. The aftermath of the 1991 balance of payments and foreign exchange
crisis saw a paradigm shift in Indias economic and financial policies. The approa
ch under the reform era included a thrust towards liberalisation, privatisation,
globalisation and concerted efforts at strengthening the existing and emerging
institutions and market participants. The Reserve Bank adopted international bes
t practices in areas, such as, prudential regulation, banking technology, variet
y of monetary policy instruments, external sector management and currency manage
ment to make the new policy framework effective. The rapid pace of growth achiev
ed by the financial system in the deregulated regime necessitated a deepening an
d widening of access to banking services. The new millennium has seen the Reserv
e Bank play an active role in balancing the relationship between banks and custo
mers; focusing on financial inclusion; setting up administrative machinery to ha
ndle customer grievances; pursuing clean note policy and ensuring development an
d oversight of secure and robust payment and settlement systems. 10

The last one-and-a-half decades have also seen growing integration of the nation
al economy and financial system with the globalising world. While rising global
integration has its advantages in terms of expanding the scope and scale of grow
th of the Indian economy, it also exposes India to global shocks. Hence, maintai
ning financial stability became an important mandate for the Reserve Bank. This,
in turn, has brought forth the need for effective coordination and consultation
with other regulators within the country and abroad. The following chapters pro
vide more details on the primary functions of the Reserve Bank.

2 Organisation
Central Board of Directors Governor Deputy Governors Executive Directors Princip
al Chief General Manager Chief General Managers General Managers Deputy General
Managers Assistant General Managers Managers Assistant Managers Support Staff

Central Board of Directors The Central Board of Directors is at the top of the R
eserve Banks organisational structure. Appointed by the Government under the prov
isions of the Reserve Bank of India Act, 1934, the Central Board has the primary
authority and responsibility for the oversight of the Reserve Bank. It delegate
s specific functions to the Local Boards and various committees. The Governor is
the Reserve Banks chief executive. The Governor supervises and directs the affai
rs and business of the RBI. The management team also includes Deputy Governors a
nd Executive Directors. The Central Government nominates fourteen Directors on t
he Central Board, including one Director each from the four Local Boards. The ot
her ten Directors represent different sectors of the economy, such as, agricultu
re, industry, trade, and professions. All these appointments are made for a peri
od of four years. The Government also nominates one Government official as a Dir
ector representing the Government, who is usually the Finance Secretary to the G
overnment of India and remains on the Board during the pleasure of the Central Go
vernment. The Reserve Bank Governor and a maximum of four Deputy Governors are al
so ex officio Directors on the Central Board. Local Boards The Reserve Bank also
has four Local Boards, constituted by the Central Government under the RBI Act,
one each for the Western, Eastern, Northern and Southern areas of the country,
which are located in Mumbai, Kolkata, New Delhi and Chennai. Each of these Board
s has five members appointed by the Central Government for a term of four years.
These Boards represent territorial and economic interests of their respective a
reas, and advise the Central Board on matters, such as, issues relating to local
cooperative and indigenous banks. They also perform other functions that the Ce
ntral Board may delegate to them. Offices and Branches The Reserve Bank has a ne
twork of offices and branches through which it discharges its responsibilities.
The units operating in the four metros Mumbai, Kolkata, Delhi and Chennai are kn
own as offices, while the units located at other cities and towns are called bra
nches. Currently, the Reserve Bank has its offices, including branches, at 27 lo
cations in India. The offices and larger branches are headed by a senior officer
in the rank of Chief General Manager, designated as Regional Director while sma
ller branches are headed by a senior officer in the rank of General Manager. 13

Central Office Departments Over the last 75 years, as the functions of the Reser
ve Bank kept evolving, the work areas were allocated among various departments.
At times, the changing role of the Reserve Bank necessitated closing down of som
e departments and creation of new departments. Currently, the Banks Central Offic
e, located at Mumbai, has twenty-seven departments. (Box No.3) These departments
frame policies in their respective work areas. They are headed by senior office
rs in the rank of Chief General Manager.


and Supervision

Department of External Investments and Operations
Financial Marke
ts Department Financial Stability Unit Internal Debt Management Department Monet
ary Policy Department Department of Banking Operations and Development Departmen
t of Banking Supervision Department of Non-Banking Supervision Foreign Exchange
Department Rural Planning and Credit Department Urban Banks Department Departmen
t of Economic Analysis and Policy Department of Statistics and Information Manag
ement Customer Service Department Department of Currency Management Department o
f Government and Bank Accounts Department of Payment and Settlement Systems Depa
rtment of Administration and Personnel Management Department of Communication De
partment of Expenditure and Budgetary Control Department of Information Technolo
gy Human Resources Development Department Inspection Department Legal Department
Premises Department Rajbhasha Department Secretarys Department
Box 3
Central Office Departments

The Central Board has primary authority for the oversight of RBI. It delegates s
pecific functions through its committees, boards and sub-committees. Board for Fi
nancial Supervision (BFS) In terms of the regulations formulated by the Central
Board under Section 58 of the RBI Act, the Board for Financial Supervision (BFS)
was constituted in November 1994, as a committee of the Central Board, to under
take integrated supervision of different sectors of the financial system. Entiti
es in this sector include banks, financial institutions and non-banking financia
l companies (including Primary Dealers). The Reserve Bank Governor is the Chairm
an of the BFS and the Deputy Governors are the ex officio members. One Deputy Go
vernor, usually the Deputy Governor in-charge of banking regulation and supervis
ion, is nominated as the Vice-Chairperson and four directors from the Reserve Ba
nks Central Board are nominated as members of the Board by the Governor. The Boar
d is required to meet normally once a month. It deliberates on various regulator
y and supervisory policy issues, including the findings of on-site supervision a
nd off-site surveillance carried out by the supervisory departments of the Reser
ve Bank and gives directions for policy formulation. The Board thus plays a crit
ical role in the effective discharge of the Reserve Banks regulatory and supervis
ory responsibilities. Audit Sub-Committee The BFS has constituted an Audit Sub-C
ommittee under the BFS Regulations to assist the Board in improving the quality
of the statutory audit and internal audit in banks and financial institutions. T
he Deputy Governor in charge of regulation and supervision heads the sub-committ
ee and two Directors of the Central Board are its members. Board for Regulation
and Supervision of Payment and Settlement Systems (BPSS) The Board for Regulatio
n and Supervision of Payment and Settlement Systems provides an oversight and di
rection for policy initiatives on payment and settlement systems within the coun
try. The Reserve Bank Governor is the Chairman of the BPSS, while two Deputy Gov
ernors, three Directors of the Central Board and some permanent invitees with do
main expertise are its members. The BPSS lays down policies for regulation and s
upervision of payment and settlement systems, sets standards for existing and fu
ture systems, authorises such systems, and lays down criteria for their membersh
ip. 16

Subsidiaries of the RBI The Reserve Bank has the following fully - owned subsidi
aries: Deposit Insurance and Credit Guarantee Corporation (DICGC) With a view to
integrating the functions of deposit insurance and credit guarantee, the Deposi
t Insurance Corporation and Credit Guarantee Corporation of India were merged an
d the present Deposit Insurance and Credit Guarantee Corporation (DICGC) came in
to existence on July 15, 1978. Deposit Insurance and Credit Guarantee Corporatio
n (DICGC), established under the DICGC Act 1961, is one of the wholly owned subs
idiaries of the Reserve Bank. The DICGC insures all deposits (such as savings, f
ixed, current, and recurring deposits) with eligible banks except the following:
Deposits of foreign Governments; (ii) Deposits of Central/State Gover
nments; (iii)
Inter-bank deposits; (iv)
Deposits of the State Land Deve
lopment Banks with the State cooperative bank; (v)
Any amount due on account of any deposit received outside India; (vi) Any amo
unt, which has been specifically exempted by the
tion with the previous approval of Reserve Bank of India. Every eligible bank de
positor is insured upto a maximum of Rs.1,00,000 (Rupees One Lakh) for both prin
cipal and interest amount held by him. National Housing Bank (NHB) National Hous
ing Bank was set up on July 9, 1988 under the National Housing Bank Act, 1987 as
a wholly-owned subsidiary of the Reserve Bank to act as an apex level instituti
on for housing. NHB has been established to achieve, among other things, the fol
lowing objectives: n
To promote a sound, healthy, viable and cost effective
housing finance
system to all segments of the population and to integra
te the housing finance system with the overall financial system. n
To prom
ote a network of dedicated housing finance institutions to
adequately serv
e various regions and different income groups. n
To augment resources fo
r the sector and channelise them for housing. n To make housing credit more aff
ordable. n
To regulate the activities of housing finance companies based o
regulatory and supervisory authority derived under the Act. n To enco
urage augmentation of supply of buildable land and also building
ls for housing and to upgrade the housing stock in the country. n
To enco
urage public agencies to emerge as facilitators and suppliers of
d land for housing. 17

Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL) The Reserve Bank es
tablished BRBNMPL in February 1995 as a wholly-owned subsidiary to augment the p
roduction of bank notes in India and to enable bridging of the gap between suppl
y and demand for bank notes in the country. The BRBNMPL has been registered as a
Public Limited Company under the Companies Act, 1956 with its Registered and Co
rporate Office situated at Bengaluru. The company manages two Presses, one at My
sore in Karnataka and the other at Salboni in West Bengal. National Bank for Agr
iculture and Rural Development (NABARD) National Bank of Agriculture and Rural D
evelopment (NABARD) is one of the subsidiaries where the majority stake is held
by the Reserve Bank. NABARD is an apex Development Bank with a mandate for facil
itating credit flow for promotion and development of agriculture, small-scale in
dustries, cottage and village industries, handicrafts and other rural crafts. It
also has the mandate to support all other allied economic activities in rural a
reas, promote integrated and sustainable rural development and secure prosperity
of rural areas. Staff Strength As of June 30, 2009, the Reserve Bank had a tota
l staff strength of 20,572. Nearly 46% of the employees were in the officer grad
e, 19% in the clerical cadre and the remaining 35% were sub staff. While 17,351
staff members were attached to Regional Offices, 3,221 were attached to various
Central Office departments. Training and Development The Reserve Bank attaches u
tmost importance to the development of human capital and skill upgradation in th
e Indian financial sector. For this purpose, it has, since long, put in place se
veral institutional measures for ongoing training and development of the staff o
f the banking industry as well as its own staff. Training Establishments The Res
erve Bank currently has two training colleges and four zonal training centres an
d is also setting up an advanced learning centre. The Reserve Bank Staff College
(originally known as Staff Training College), set up in Chennai in 1963, offers
residential training programmes, primarily to its junior and middle-level offic
ers as well as to officers of other central banks, in various areas. The program
mes offered can be placed in four broad categories: Broad Spectrum, Functional,
Information Technology and Human Resources Management. 18

The College of Agricultural Banking set up in Pune in 1969, focuses on training

the senior and middle level officers of rural and co-operative credit sectors. I
n recent years, it has diversified and expanded the training coverage into areas
relating to non-banking financial companies, human resource management and info
rmation technology. Both these colleges together conduct nearly 300 training pro
grammes every year, imparting training to over 7,500 staff. The Reserve Bank is
also in the process of setting up the Centre for Advanced Financial Learning (CA
FL) replacing the Bankers Training College, Mumbai. In addition, the Reserve Bank
also has four Zonal Training Centres (ZTCs), in Chennai, Kolkata, Mumbai (Belap
ur) and New Delhi, primarily for training its clerical and sub-staff. However, o
f late, the facilities at the ZTCs are also being leveraged for training the jun
ior officers of the Reserve Bank. Academic Institutions The Reserve Bank has als
o set up autonomous institutions, such as, National Institute of Bank Management
(NIBM), Pune; Indira Gandhi Institute for Development Research (IGIDR), Mumbai;
and the Institute for Development and Research in Banking Technology (IDRBT), H
yderabad. National Institute of Bank Management (NIBM) was established as an aut
onomous apex institution with a mandate of playing a pro-active role of a think-t
ank of the banking system. The Institute is engaged in research (policy and opera
tions), education and training of senior bankers and development finance adminis
trators, and consultancy to the banking and financial sectors. Publication of bo
oks and journals is also integral to its objectives. International Monetary Fund
(IMF), in collaboration with Australian Government Overseas Aid Programme (AUSAID) and the Reserve Bank, has set-up its seventh international centre, the Join
t India-IMF Training Programme (ITP) in NIBM for South Asia and Eastern Africa r
egions. The Indira Gandhi Institute of Development Research (IGIDR) is an advanc
ed research institute for carrying out research on development issues. Starting
as a purely research institution, it quickly grew into a full-fledged teaching c
um research organisation when in 1990 it launched a Ph.D. programme in the field
of development studies. The objective of the Ph.D. programme is to produce anal
ysts with diverse disciplinary background who can address issues of economics, e
nergy and environment policies. In 1995 an M. Phil programme was also started. T
he institute is fully funded by the Reserve Bank. 19

IDRBT was established in 1996 as an Autonomous Centre for Development and Resear
ch in Banking Technology. The research and development activities of the Institu
te are aimed at improving banking technology in the country. While addressing th
e immediate concerns of the banking sector, research at the Institute is focused
towards anticipating the future needs and requirements of the sector and develo
ping technologies to address them. The current focal areas of research in the In
stitute are: Financial Networks and Applications,Electronic Payments and Settlemen
t Systems, Security Technologies for the Financial Sector,Technology Based Educat
ion, Training and Development,Financial Information Systems and Business Intellig
ence. The Institute is also actively involved in the development of various stan
dards and systems for banking technology, in coordination with the Reserve Bank
of India, Indian Banks Association, Ministry of Communication and Information Tec
hnology, Government of India, and the various high-level committees constituted
at the industry and national levels.

3 Monetary Management
One of the most important functions of central banks is formulation and executio
n of monetary policy. In the Indian context, the basic functions of the Reserve
Bank of India as enunciated in the Preamble to the RBI Act, 1934 are: to regulate
the issue of Bank notes and the keeping of reserves with a view to securing mon
etary stability in India and generally to operate the currency and credit system
of the country to its advantage. Thus, the Reserve Banks mandate for monetary pol
icy flows from its monetary stability objective. Essentially, monetary policy de
als with the use of various policy instruments for influencing the cost and avai
lability of money in the economy. As macroeconomic conditions change, a central
bank may change the choice of instruments in its monetary policy. The overall go
al is to promote economic growth and ensure price stability.

Monetary Policy in India Over time, the objectives of monetary policy in India h
ave evolved to include maintaining price stability, ensuring adequate flow of cr
edit to productive sectors of the economy for supporting economic growth, and ac
hieving financial stability. Based on its assessment of macroeconomic and financ
ial conditions, the Reserve Bank takes the call on the stance of monetary policy
and monetary measures. Its monetary policy statements reflect the changing circ
umstances and priorities of the Reserve Bank and the thrust of policy measures f
or the future. Faced with multiple tasks and a complex mandate, the Reserve Bank
emphasises clear and structured communication for effective functioning of the
monetary policy. Improving transparency in its decisions and actions is a consta
nt endeavour at the Reserve Bank. The Governor of the Reserve Bank announces the
Monetary Policy in April every year for the financial year that ends in the fol
lowing March. This is followed by three quarterly reviews in July, October and J
anuary. However, depending on the evolving situation, the Reserve Bank may annou
nce monetary measures at any point of time. The Monetary Policy in April and its
Second Quarter Review in October consist of two parts: Part A provides a review
of the macroeconomic and monetary developments and sets the stance of the monet
ary policy and the monetary measures. Part B provides a synopsis of the action t
aken and the status of past policy announcements together with fresh policy meas
ures. It also deals with important topics, such as, financial stability, financi
al markets, interest rates, credit delivery, regulatory norms, financial inclusi
on and institutional developments. However, the First Quarter Review in July and
the Third Quarter Review in January consist of only Part A. Monetary Policy Frame
work The monetary policy framework in India, as it is today, has evolved over th
e years. The success of monetary policy depends on many factors.

Operating Target There was a time when the Reserve Bank used broad money (M3) as
the policy target. However, with the weakened relationship between money, outpu
t and prices, it replaced M3 as a policy target with a multiple indicators appro
ach. As the name suggests, the multiple indicators approach looks at a large num
ber of indicators from which policy perspectives are derived. Interest rates or
rates of return in different segments of the financial markets along with data o
n currency, credit, trade, capital flows, fiscal position, inflation, exchange r
ate, and such other indicators, are juxtaposed with the output data to assess th
e underlying trends in different sectors. Such an approach provides considerable
flexibility to the Reserve Bank to respond more effectively to changes in domes
tic and international economic environment and financial market conditions. Mone
tary Policy Instruments The Reserve Bank traditionally relied on direct instrume
nts of monetary control such as Cash Reserve Ratio (CRR) and Statutory Liquidity
Ratio (SLR). Cash Reserve Ratio indicates the quantum of cash that banks are re
quired to keep with the Reserve Bank as a proportion of their net demand and tim
e liabilities. SLR prescribes the amount of money that banks must invest in secu
rities issued by the government. In the late 1990s, the Reserve Bank restructure
d its operating framework for monetary policy to rely more on indirect instrumen
ts such as Open Market Operations (OMOs). In addition, in the early 2000s, the R
eserve Bank instituted Liquidity Adjustment Facility (LAF) to manage day-to-day
liquidity in the banking system. These facilities enable injection or absorption
of liquidity that is consistent with the prevailing monetary policy stance. The
repo rate (at which liquidity is injected) and reverse repo rate (at which liqu
idity is absorbed) under the LAF have emerged as the main instruments for the Re
serve Banks interest rate signalling in the Indian economy. The armour of instrum
ents with the Reserve Bank to manage liquidity was strengthened in April 2004 wi
th the Market Stabilisation Scheme (MSS). The MSS was specifically introduced to
manage excess liquidity arising out of huge capital flows coming to India from
abroad. In addition, the Reserve Bank also uses prudential tools to modulate the
flow of credit to certain sectors so as to ensure financial stability. The avai
lability of multiple instruments and their flexible use in the implementation of
monetary policy have enabled the Reserve Bank to successfully influence the liq
uidity and interest rate conditions in the economy. While the Reserve Bank prefe
rs 23

indirect instruments of monetary policy, it has not hesitated in taking recourse

to direct instruments if circumstances warrant such actions. Often, complex sit
uations require varied combination of direct and indirect instruments to make th
e policy transmission effective. The recent legislative amendments to the Reserv
e Bank of India Act, 1934 enable a flexible use of CRR for monetary management,
without being constrained by a statutory floor or ceiling on the level of the CR
R. The amendments to the Banking Regulation Act, 1949 also provide further flexi
bility in liquidity management by enabling the Reserve Bank to lower the SLR to
levels below the pre-amendment statutory minimum of 25 per cent of net demand an
d time liabilities (NDTL) of banks.
Monetary Policy Transmission An important factor that determines the effectivene
ss of monetary policy is its transmission a process through which changes in the
policy achieve the objectives of controlling inflation and achieving growth. In
the implementation of monetary policy, a number of transmission channels have b
een identified for influencing real sector activity. These are (a) the quantum c
hannel relating to money supply and credit; (b) the interest rate channel; (c) t
he exchange rate channel; and (d) the asset price channel. How these channels fu
nction in an economy depends on its stage of development and its underlying fina
ncial structure. For example, in an open economy one would expect the exchange r
ate channel to be important; similarly, in an economy where banks are the major
source of finance as against the capital market, credit channel could be a major
conduit for monetary transmission. Of course, these channels are not mutually e
xclusive, and there could be considerable feedback and interaction among them.
Box 4
Institutional Mechanism for Monetary Policy-making The Reserve Bank has made int
ernal institutional arrangements for guiding the process of monetary policy form

Financial Markets Committee (FMC) Constituted in 1997, the inter-departmental Fi

nancial Markets Committee is chaired by the Deputy Governor in-charge of monetar
y policy formulation. Heads of various departments dealing with markets, and the
head of the Monetary Policy Department (MPD) are its members. They meet every m
orning and review developments in money, foreign exchange and government securit
ies markets. The FMC also makes an assessment of liquidity conditions and sugges
ts appropriate market interventions on a day-to-day basis. Monetary Policy Strat
egy Group The Monetary Policy Strategy Group is headed by the Deputy Governor in
charge of MPD. The group comprises Executive Directors (EDs) in-charge of differ
ent markets departments and heads of other departments. It generally meets twice
in a quarter to review monetary and credit conditions and takes a view on the s
tance of the monetary policy. Technical Advisory Committee (TAC) on Monetary Pol
icy The Reserve Bank had constituted a Technical Advisory Committee (TAC) on Mon
etary Policy in July 2005 with a view to strengthening the consultative process
in the conduct of monetary policy. This TAC reviews macroeconomic and monetary d
evelopments and advises the Reserve Bank on the stance of the monetary policy an
d monetary measures that may be undertaken in the ensuing policy reviews. The Co
mmittee has, as its members, five external experts and two Directors from the Re
serve Banks Central Board. The external experts are chosen from the areas of mone
tary economics, central banking, financial markets and public finance. The Commi
ttee is chaired by the Governor, with the Deputy Governor incharge of monetary p
olicy as the vice-chairman. The other Deputy Governors of the Reserve Bank are a
lso members of this Committee. The TAC normally meets once in a quarter, althoug
h a meeting could be convened at any other time, if necessary. The role of the T
AC is advisory in nature. The responsibility, accountability and time path of th
e decision making remains entirely with the Reserve Bank. Pre-Policy Consultatio
n Meetings The Reserve Bank aims to make the policy making process consultative,
reaching out to a variety of stakeholders and experts ahead of each Monetary Po
licy and quarterly Review.

From October 2005, the Reserve Bank has introduced pre-policy consultation meeti
ngs with the Indian Banks Association (IBA), market participants, representatives
of trade and industry, credit rating agencies and other institutions, such as,
urban co-operative banks, micro-finance institutions, small and medium enterpris
es, non-banking finance companies, rural cooperatives and regional rural banks.
In order to further improve monetary policy communication, the Governor also mee
ts economists, journalists and media analysts. These meetings focus on macroecon
omic developments, liquidity position, interest rate environment and monetary an
d credit developments. This consultative process contributes to enriching the po
licy formulation process and enhances the effectiveness of monetary policy measu
res. Resource Management Discussions The Reserve Bank holds Resource Management
Discussions (RMD) meetings with select banks about one and a half months prior t
o the announcement of the Monetary Policy and the Second Quarter Review. These d
iscussions are chaired by the Deputy Governor in-charge of monetary policy formu
lation. These meetings mainly focus on perception and outlook of bankers on the
economy, liquidity conditions, credit outflows, developments in different market
segments and the direction of interest rates. Bankers offer their suggestions f
or the policy. The feedback received from these meetings is analysed and taken a
s inputs while formulating monetary policy.

4 Issuer of Currency
Management of currency is one of the core central banking functions of the Reser
ve Bank for which it derives the necessary statutory powers from Section 22 of t
he RBI Act, 1934. Along with the Government of India, the Reserve Bank is respon
sible for the design, production and overall management of the nations currency,
with the goal of ensuring an adequate supply of clean and genuine notes. In cons
ultation with the Government, the Reserve Bank routinely addresses security issu
es and targets ways to enhance security features to reduce the risk of counterfe
iting or forgery of currency notes.
The Paper Currency Act of 1861 conferred upon the Government of India the monopo
ly of note issues, thus ending the practice of private and presidency banks issu
ing currency. Between 1861 and 1935, the Government of India managed the issue o
f paper currency. In 1935, when the Reserve Bank began operations, it took over
the function of note issue from the Office of the Controller of Currency, Govern
ment of India.

Currency Unit and Denomination The Indian Currency is called the Indian Rupee (a
bbreviated as Re. in singular and Rs. in plural), and its sub-denomination the P
aisa (plural Paise). At present, notes in India are issued in the denomination o
f Rs.5, Rs.10, Rs.20, Rs.50, Rs.100, Rs.500 and Rs.1,000. The printing of Re.1 a
nd Rs.2 denominations has been discontinued. However, notes in these denominatio
ns issued earlier are still valid and in circulation. The Reserve Bank is also a
uthorised to issue notes in the denominations of five thousand rupees and ten th
ousand rupees or any other denomination, but not exceeding ten thousand rupees,
that the Central Government may specify. Thus, in terms of current provisions of
RBI Act 1934, notes in denominations higher than ten thousand rupees cannot be
issued. Coin Denomination Coins in India are available in denominations of 10 pa
isa, 20 paisa, 25 paisa, 50 paisa, one rupee, two rupees, five rupees and ten ru
pees. Coins up to 50 paisa are called small coins and coins of Rupee one and above
are called Rupee coins. As per the provisions of Coinage Act, 1906, coins can be
issued up to the denomination of Rs.1,000.
Box 5
Currency Management The Reserve Bank carries out the currency management functio
n through its Department of Currency Management located at its Central Office in
Mumbai, 19 Issue Offices located across the country and a currency chest at its
Kochi branch . To facilitate the distribution of notes and rupee coins across t
he country, the Reserve Bank has authorised selected branches of banks to establ
ish currency chests. There is a network of 4,281 Currency Chests and 4,044 Small
Coin Depots with other banks. Currency chests are storehouses where bank notes
and rupee coins are stocked on behalf of the Reserve Bank. The currency chests h
ave been established with State Bank of India, six associate banks, nationalised
banks, private sector banks, a foreign bank, a state cooperative bank and a reg
ional rural bank. Deposits into the currency chest are treated as reserves with
the Reserve Bank and are included in the CRR. The reverse is applicable for with
drawals from chests. Like currency chests, there are also small coin depots whic
h have been established by the authorised bank branches to stock small coins. Th
e small coin depots distribute small coins to other bank branches in their area
of operation. The Department of Currency Management makes recommendations on des
ign of bank notes to the Central Government, forecasts the demand for notes, 28

and ensures smooth distribution of notes and coins throughout the country. It ar
ranges to withdraw unfit notes, administers the provisions of the RBI (Note Refu
nd) Rules, 2009 (these rules deal with the payment of value of the soiled or mut
ilated notes) and reviews/rationalises the work systems and procedures at the is
sue offices on an ongoing basis. The RBI Act requires that the Reserve Banks affa
irs relating to note issue and its general banking business be conducted through
two separate departments the Issue Department and the Banking Department. All t
ransactions relating to the issue of currency notes are separately conducted, fo
r accounting purposes, in the Issue Department. The Issue Department is liable f
or the aggregate value of the currency notes of the Government of India (currenc
y notes issued by the Government of India prior to the issue of bank notes by th
e Reserve Bank) and bank notes of the Reserve Bank in circulation from time to t
ime and it maintains eligible assets for equivalent value. The assets which form
the backing for note issue are kept wholly distinct from those of the Banking D
epartment. The Issue Department is permitted to issue notes only in exchange for
notes of other denominations or against prescribed assets. This Department is a
lso responsible for getting its periodical requirements of notes/coins from the
currency printing presses/mints, distribution of notes and coins among the publi
c as well as withdrawal of unserviceable notes and coins from circulation. The m
echanism for putting currency into circulation and its withdrawal from circulati
on (that is, expansion and contraction of currency, respectively) is effected th
rough the Banking Department. Currency Distribution The Government of India on t
he advice of the Reserve Bank decides on the various denominations of the notes
to be printed. The Reserve Bank coordinates with the Government in designing the
banknotes, including their security features. For printing of notes, the Securi
ty Printing and Minting Corporation of India Limited (SPMCIL), a wholly owned co
mpany of the Government of India, has set up printing presses at Nashik, Maharas
htra and Dewas, Madhya Pradesh. The Bharatiya Reserve Bank Note Mudran Pvt. Ltd.
(BRBNMPL), a wholly owned subsidiary of the Reserve Bank, also has set up print
ing presses at Mysore in Karnataka and Salboni in West Bengal. The Reserve Bank
estimates the quantity of notes (denomination-wise) that is likely to be require
d and places indents with the various presses. The notes received from the press
es are then issued for circulation both through remittances to banks as also acr
oss the Reserve Bank counters. Currency chests, which are maintained by 29

banks, store soiled and re-issuable notes, as also fresh banknotes. The banks se
nd notes, which in their opinion are unfit for circulation, back to the Reserve
Bank. The Reserve Bank examines these notes and re-issues those that are found f
it for circulation. The soiled notes are destroyed, through shredding, so as to
maintain the quality of notes in circulation. Coin Distribution The Indian Coina
ge Act, 1906 governs the minting of rupee coins, including small coins of the va
lue of less than one rupee. One rupee notes (no longer issued now) and coins are
legal tender in India for unlimited amounts. Fifty paisa coins are legal tender
for any sum not exceeding ten rupees and smaller coins for any sum not exceedin
g one rupee. The Reserve Bank acts as an agent of the Central Government for dis
tribution, issue and handling of the coins (including one rupee note) and for wi
thdrawing and remitting them back to Government as may be necessary. SPMCIL has
four mints at Mumbai, Noida (UP), Kolkata and Hyderabad for coin production. Sim
ilar to distribution of banknotes, coins are distributed through various channel
s such as Reserve Bank counters, banks, post offices, regional rural banks and u
rban cooperative banks. The Reserve Bank offices also sometimes organise special
coin melas for exchanging notes into coins through retail distribution. Just as
unfit banknotes are destroyed, unfit coins are also withdrawn from circulation
and sent to the mint for melting. Special Type of Notes A special Star series of
notes in three denominations of rupees ten, twenty and fifty have been issued s
ince August 2006 to replace defectively printed notes at the printing presses. T
he Star series banknotes are exactly like the existing Mahatma Gandhi Series bankn
otes, but have an additional character a (star) in the number panel in the space b
etween the prefix and the number. The packets containing these banknotes will no
t, therefore, have sequential serial numbers, but contain 100 banknotes, as usua
l.This facility has been further extended to Rs. 100 notes with effect from June
2009. The bands on such packets indicate the presence of such notes. Exchange of
Notes Basically there are two categories of notes which are exchanged between b
anks and the Reserve Bank soiled notes and mutilated notes. While soiled notes a
re notes which have become dirty and limp due to excessive use or a two-piece no
te, mutilated note means a note of which a portion is missing or which is compos
ed of more than two pieces. While soiled notes can be 30

tendered and exchanged at all bank branches, mutilated notes are exchanged at de
signated bank branches and such notes can be exchanged for value through an adju
dication process which is governed by Reserve Bank of India (Note Refund) Rules,
2009. Under current provisions, either full or no value for notes of denominati
on up to Rs.20 is paid, while notes of Rs.50 and above would get full, half, or
no value, depending on the area of the single largest undivided portion of the n
ote. Special adjudication procedures exist at the Reserve Bank Issue offices for
notes which have turned extremely brittle or badly burnt, charred or inseparabl
y stuck together and, therefore, cannot withstand normal handling. Combating Cou
nterfeiting To combat the incidence of forged notes, the Reserve Bank has taken
certain measures like publicity campaigns on security features of bank notes and
display of Know Your Bank note poster at bank branches including at offsite ATMs.
The Reserve Bank, in consultation with the Government of India, periodically re
views and upgrades the security features of the bank notes to deter counterfeiti
ng. It also shares information with various law enforcement agencies to address
the issue of counterfeiting. It has also issued detailed guidelines to banks and
government treasury offices on how to detect and impound counterfeit notes.

Banker and Debt Manager to Government
Since its inception, the Reserve Bank has undertaken the traditional central ban
king function of managing the governments banking transactions. The Reserve Bank
of India Act, 1934 requires the Central Government to entrust the Reserve Bank w
ith all its money, remittance, exchange and banking transactions in India and th
e management of its public debt. The Government also deposits its cash balances
with the Reserve Bank. The Reserve Bank may also, by agreement, act as the banke
r to a State Government. Currently, the Reserve Bank acts as banker to all the S
tate Governments in India, except Jammu & Kashmir and Sikkim. It has limited agr
eements for the management of the public debt of these two State Governments. As
a banker to the Government, the Reserve Bank receives and pays money on behalf
of the various Government departments. As it has offices in only 27 locations, t
he Reserve Bank appoints other banks to act as its agents for undertaking the ba
nking business on behalf of the governments. The Reserve Bank pays agency bank c
harges to the banks for undertaking the government 32

business on its behalf. The Reserve Bank has well defined obligations and provid
es several services to the governments. The Central Government and State Governm
ents may make rules for the receipt, custody and disbursement of money from the
consolidated fund, contingency fund, and public account. These rules are legally
binding on the Reserve Bank. The Reserve Bank also undertakes to float loans an
d manage them on behalf of the Governments. It also provides Ways and Means Adva
nces a short-term interest bearing advance to the Governments, to meet the tempo
rary mismatches in their receipts and payments. Besides, it arranges for investm
ents of surplus cash balances of the Governments as a portfolio manager. The Res
erve Bank also acts as adviser to Government, whenever called upon to do so, on
monetary and banking related matters. The banking functions for the governments
are carried out by the Public Accounts Departments at the offices / branches of
the Reserve Bank, while management of public debt including floatation of new lo
ans is done at Public Debt Office at offices / branches of the Reserve Bank and
by the Internal Debt Management Department at the Central Office. For the final
compilation of the Government accounts, both of the centre and states, the Nagpu
r office of the Reserve Bank has a Central Accounts Section. Banker to the Centr
al Government Under the administrative arrangements, the Central Government is r
equired to maintain a minimum cash balance with the Reserve Bank. Currently, thi
s amount is Rs.10 crore on a daily basis and Rs.100 crore on Fridays, as also at
the end of March and July. Under a scheme introduced in 1976, every ministry an
d department of the Central Government has been allotted a specific public secto
r bank for handling its transactions. Hence, the Reserve Bank does not handle go
vernments day-to-day transactions as before, except where it has been nominated a
s banker to a particular ministry or department. In 2004, a Market Stabilisation
Scheme (MSS) was introduced for issuing of treasury bills and dated securities
over and above the normal market borrowing programme of the Central Government f
or absorbing excess liquidity. The Reserve Bank maintains a separate MSS cash ba
lance of the Government, which is not part of the Consolidated Fund of India. As
banker to the Government, the Reserve Bank works out the overall funds 33

position and sends daily advice showing the balances in its books, Ways and Mean
s Advances granted to the government and investments made from the surplus fund.
The daily advices are followed up with monthly statements. Banker to the State
Governments All the State Governments are required to maintain a minimum balance
with the Reserve Bank, which varies from state to state depending on the relati
ve size of the state budget and economic activity. To tide over temporary mismat
ches in the cash flow of receipts and payments, the Reserve Bank provides Ways a
nd Means Advances to the State Governments. The WMA scheme for the State Governm
ents has provision for Special and Normal WMA. The Special WMA is extended again
st the collateral of the government securities held by the State Government. Aft
er the exhaustion of the special WMA limit, the State Government is provided a n
ormal WMA. The normal WMA limits are based on three-year average of actual reven
ue and capital expenditure of the state. The withdrawal above the WMA limit is c
onsidered an overdraft. A State Government account can be in overdraft for a max
imum 14 consecutive working days with a limit of 36 days in a quarter. The rate
of interest on WMA is linked to the Repo Rate. Surplus balances of State Governm
ents are invested in Government of India 14-day Intermediate Treasury bills in a
ccordance with the instructions of the State Governments. Management of Public D
ebt The Reserve Bank manages the public debt and issues new loans on behalf of t
he Central and State Governments. It involves issue and retirement of rupee loan
s, interest payment on the loan and operational matters about debt certificates
and their registration. The union budget decides the annual borrowing needs of t
he Central Government. Parameters, such as, interest rate, timing and manner of
raising of loans are influenced by the state of liquidity and the expectations o
f the market. The Reserve Banks debt management policy aims at minimising the cos
t of borrowing, reducing the roll-over risk, smoothening the maturity structure
of debt, and improving depth and liquidity of Government securities markets by d
eveloping an active secondary market. While formulating the borrowing programme
for the year, the Government and the Reserve Bank take into account a number of
factors, such as, the amount of Central and State loans maturing during the year
, the estimated available resources, and the absorptive capacity of the market.

6 Banker to Banks
Banks are required to maintain a portion of their demand and time liabilities as
cash reserves with the Reserve Bank, thus necessitating a need for maintaining
accounts with the Bank. Further, banks are in the business of accepting deposits
and giving loans. Since different persons deal with different banks, in order t
o settle transactions between various customers maintaining accounts with differ
ent banks, these banks have to settle transactions among each other. Settlement
of inter-bank obligations thus assumes importance. To facilitate smooth operatio
n of this function of banks, an arrangement has to be made to transfer money fro
m one bank to another. This is usually done through the mechanism of a clearing
house where banks present cheques and other such instruments for clearing. Many
banks also engage in other financial activities, such as, buying and selling sec
urities and foreign currencies. Here too, they need to exchange funds between th
emselves. In order to facilitate a smooth inter-bank transfer of funds, or to ma
ke payments and to receive funds on their behalf, banks need a common banker. 35

In order to meet the above objectives, in India, the Reserve Bank provides banks
with the facility of opening accounts with itself. This is the Banker to Banks fu
nction of the Reserve Bank, which is delivered through the Deposit Accounts Depa
rtment (DAD) at the Regional offices. The Department of Government and Bank Acco
unts oversees this function and formulates policy and issues operational instruc
tions to DAD. Reserve Bank as Banker to Banks To fulfill this function, the Rese
rve Bank opens current accounts of banks with itself, enabling these banks to ma
intain cash reserves as well as to carry out inter-bank transactions through the
se accounts. Inter-bank accounts can also be settled by transfer of money throug
h electronic fund transfer system, such as, the Real Time Gross Settlement Syste
m (RTGS). The Reserve Bank continuously monitors operations of these accounts to
ensure that defaults do not take place. Among other provisions, the Reserve Ban
k stipulates minimum balances to be maintained by banks in these accounts. Since
banks need to settle funds with each other at various places in India, they are
allowed to open accounts with different regional offices of the Reserve Bank. T
he Reserve Bank also facilitates remittance of funds from a banks surplus account
at one location to its deficit account at another. Such transfers are electroni
cally routed through a computerised system. The computerisation of accounts at t
he Reserve Bank has greatly facilitated banks monitoring of their funds position
in various accounts across different locations on a real-time basis.
As Banker to Banks, the Reserve Bank focuses on:
Enabling smooth, swift
and seamless clearing and settlement of inter-bank
ng an efficient means of funds transfer for banks.
Enabling banks to maint
ain their accounts with the Reserve Bank for
statutory reserve requirements
and maintenance of transaction balances.
Acting as a lender of last reso
Box 6
In addition, the Reserve Bank has also introduced the Centralised Funds Manageme
nt System (CFMS) to facilitate centralised funds enquiry and transfer of funds a
cross DADs. This helps banks in their fund management as they can access informa
tion on their balances maintained across different 36

DADs from a single location. Currently, 75 banks are using the system and all DA
Ds are connected to the system. As Banker to Banks, the Reserve Bank provides sh
ort-term loans and advances to select banks, when necessary, to facilitate lendi
ng to specific sectors and for specific purposes. These loans are provided again
st promissory notes and other collateral given by the banks. Lender of Last Reso
rt As a Banker to Banks, the Reserve Bank also acts as the lender of last resort.
It can come to the rescue of a bank that is solvent but faces temporary liquidit
y problems by supplying it with much needed liquidity when no one else is willin
g to extend credit to that bank. The Reserve Bank extends this facility to prote
ct the interest of the depositors of the bank and to prevent possible failure of
a bank, which in turn may also affect other banks and institutions and can have
an adverse impact on financial stability and thus on the economy.

Financial Regulation and Supervision
The Reserve Banks regulatory and supervisory domain extends not only to the India
n banking system but also to the development financial institutions (DFIs), nonbanking financial companies (NBFCs), primary dealers, credit information compani
es and select segments of the financial markets. In respect of banks, the Reserv
e Bank derives its powers from the provisions of the Banking Regulation Act, 194
9, while the other entities and markets are regulated and supervised under the p
rovisions of the Reserve Bank of India Act, 1934. The credit information compani
es are regulated under the provisions of Credit Information Companies (Regulatio
n) Act, 2005.
As the regulator and the supervisor of the banking system, the Reserve Bank has
a critical role to play in ensuring the systems safety and soundness on an ongoin
g basis. The objective of this function is to protect the interest of depositors
through an effective prudential regulatory framework for orderly development an
d conduct of banking operations, and to maintain overall financial stability thr
ough various policy measures. 38

Indias financial system includes commercial banks, regional rural banks, local ar
ea banks, cooperative banks, financial institutions and non-banking financial co
mpanies. The banking sector reforms since the 1990s made stability in the financ
ial sector an important plank of the Reserve Banks functions. Besides, the global
financial markets have, in the last 75 years, grown phenomenally in terms of vo
lumes, number of players and instruments. The Reserve Banks regulatory and superv
isory role has, therefore, acquired added importance. The Board for Financial Su
pervision (BFS), constituted in November 1994, is the principal guiding force be
hind the Reserve Banks regulatory and supervisory initiatives. There are various
departments in the Reserve Bank that perform these regulatory and supervisory fu
nctions. The Department of Banking Operations and Development (DBOD) frames regu
lations for commercial banks. The Department of Banking Supervision (DBS) undert
akes supervision of commercial banks, including the local area banks and all-Ind
ia financial institutions. The Department of Non-Banking Supervision (DNBS) regu
lates and supervises the Non-Banking Financial Companies (NBFCs) while the Urban
Banks Department (UBD) regulates and supervises the Urban Cooperative Banks (UC
Bs). Rural Planning and Credit Department (RPCD) regulates the Regional Rural Ba
nks (RRBs) and the Rural Cooperative Banks, whereas their supervision has been e
ntrusted to NABARD. Regulatory and Supervisory Functions Traditionally, the Rese
rve Banks regulatory and supervisory policy initiatives are aimed at protection o
f the depositors interests, orderly development and conduct of banking operations
, and liquidity and solvency of banks. With the onset of banking sector reforms
during the 1990s, various prudential measures were intitated that have, in effec
t, strengthened the Indian banking system over a period of time. Improved financ
ial soundness of banks has helped them to show stability and resilience in the f
ace of the recent severe global financial crisis, which had seriously impacted s
everal banks and financial institutions in advanced countries. However, there is
still a need to strengthen the regulatory and supervisory architecture. The Res
erve Bank represents India in various international fora, such as, the Basel Com
mittee on Banking Supervision (BCBS) and the Financial Stability Board (FSB). It
s presence on such bodies has enabled the Reserve Banks active participation in t
he process of evolving global standards for enhanced regulation and supervision
of banks.

The major regulatory functions of the Reserve Bank with respect to the various c
omponents of the financial system are as follows: (i) Commercial Banks Licensing
For commencing banking operations in India, whether by an Indian or a foreign b
ank, a licence from the Reserve Bank is required. The opening of new branches by
banks and change in the location of existing branches are also regulated as per
the Branch Authorisation Policy. This policy has recently been liberalised sign
ificantly and Indian banks no longer require a licence from the Reserve Bank for
opening a branch at a place with population of below 50,000. The Reserve Bank c
ontinues to emphasise opening of branches by banks in unbanked and under-banked
areas of the country. The Reserve Bank also regulates merger, amalgamation and w
inding up of banks. Corporate Governance The Reserve Banks policy objective is to
ensure high-quality corporate governance in banks. It has issued guidelines sti
pulating fit and proper criteria for directors of banks. In terms of the guideline
s, a majority of the directors of banks are required to have special knowledge o
r practical experience in various relevant areas. The Reserve Bank also has powe
rs to appoint additional directors on the board of a banking company. Statutory
Pre-emptions Commercial banks are required to maintain a certain portion of thei
r Net Demand and Time Liabilities (NDTL) in the form of cash with the Reserve Ba
nk, called Cash Reserve Ratio (CRR) and in the form of investment in unencumbere
d approved securities, called Statutory Liquidity Ratio (SLR). The Reserve Bank
also monitors compliance with these requirements by banks in their day-to-day op
erations. Interest Rate The interest rates on most of the categories of deposits
and lending transactions have been deregulated and are largely determined by ba
nks. However, the Reserve Bank regulates the interest rates on savings bank acco
unts and deposits of non-resident Indians (NRI), small loans up to rupees two la
kh, export credits and a few other categories of advances.

Prudential Norms The Reserve Bank has prescribed prudential norms to be followed
by banks in several areas of their operations. It keeps a close watch on develo
ping trends in the financial markets, and fine-tunes the prudential policies. Pr
udential Norms In order to strengthen the balance sheets of banks, the Reserve B
ank has been prescribing appropriate prudential norms for them in regard to inco
me recognition, asset classification and provisioning, capital adequacy, investm
ents portfolio and capital market exposures, to name a few. A brief description
of these norms is furnished below: Capital Adequacy The Reserve Bank has instruc
ted banks to maintain adequate capital on a continuous basis. The adequacy of ca
pital is measured in terms of Capital to Risk-Weighted Assets Ratio (CRAR). Unde
r the recently revised framework, banks are required to maintain adequate capita
l for credit risk, market risk, operational risk and other risks. Basel II stand
ardised approach is applicable with road map drawn up for advanced approaches. L
oans and Advances In order to maintain the quality of their loans and advances,
the Reserve Bank requires banks to classify their loan assets as performing and
non-performing assets (NPA), primarily based on the record of recovery from the
borrowers. NPAs are further categorised into Sub-standard, Doubtful and Loss Ass
ets depending upon age of the NPAs and value of available securities. Banks are
also required to make appropriate provisions against each category of NPAs. Bank
s are also required to have exposure limits in place to prevent credit concentra
tion risk and limit exposures to sensitive sectors, such as, capital markets and
real estate. For Investments The Reserve Bank requires banks to classify their
investment portfolios into three categories for the purpose of valuation: Held t
o Maturity (HTM), Available for Sale (AFS) and Held for Trading (HFT). The secur
ities held under HFT and AFS categories have to be marked-to-market periodically
and depreciation, if any, needs appropriate provisions by banks. Securities und
er HTM category must be carried at acquisition / amortised cost, subject to cert
ain conditions.
Box 7

Risk Management Banks, in their daily business, face various kinds of risks. The
Reserve Bank requires banks to have effective risk management systems to cover
credit risk, market risk, operational risk and other risks. It has issued guidel
ines, based on the Basel II capital adequacy framework, on how to measure these
risks as well as how to manage them Disclosure Norms Public disclosure of releva
nt information is an important tool for enforcing market discipline. Hence, over
the years, the Reserve Bank has strengthened the disclosure norms for banks. Ba
nks are now required to make disclosures in their annual report, among others, a
bout capital adequacy, asset quality, liquidity, earnings aspects and penalties,
if any, imposed on them by the regulator. Know Your Customer Norms To prevent m
oney laundering through the banking system, the Reserve Bank has issued Know Your
Customer (KYC), Anti-Money Laundering (AML) and Combating Financing of Terrorism
(CFT) guidelines. Banks are required to carry out KYC exercise for all their cus
tomers to establish their identity and report suspicious transactions to authori
ties. Protection of Small Depositors The Reserve Bank has set up Deposit Insuran
ce and Credit Guarantee Corporation (DICGC) to protect the interest of small dep
ositors, in case of bank failure. The DICGC provides insurance cover to all elig
ible bank depositors up to Rs.1 lakh per depositor per bank. Para - banking Acti
vities The banking sector reforms and the gradual deregulation of the sector ins
pired many banks to undertake non-traditional banking activities, also known as
para-banking. The Reserve Bank has permitted banks to undertake diversified acti
vities, such as, asset management, mutual funds business, insurance business, me
rchant banking activities, factoring services, venture capital, card business, e
quity participation in venture funds and leasing. Supervisory Functions The Rese
rve Bank undertakes supervision of banks to monitor and ensure compliance by the
m with its regulatory policy framework. This is achieved through on-site inspect
ion, off-site surveillance and periodic meetings with top management of banks.

On-site Inspection The Reserve Bank undertakes annual on-site inspection of bank
s to assess their financial health and to evaluate their performance in terms of
quality of management, capital adequacy, asset quality, earnings, liquidity pos
ition as well as internal control systems. Based on the findings of the inspecti
on, banks are assigned supervisory ratings based on the CAMELS (CALCS for foreig
n banks in India) supervisory model and are required to address the weaknesses i
dentified. Off-site Surveillance The Reserve Bank requires banks to submit detai
led and structured information periodically under its Off Site Surveillance and
Monitoring System (OSMOS). This information is thoroughly analysed by the RBI to
assess the health of individual banks and that of the banking system, and also
glean early warning signals which could serve as a trigger for necessary supervi
sory intervention. Periodic Meetings The Reserve Bank periodically meets the top
management of banks to discuss the findings of its inspections. In addition, it
also has quarterly / monthly discussions with them on important aspects based o
n OSMOS returns and other inputs. Monitoring of Frauds The Reserve Bank regularl
y sensitises banks about common fraud-prone areas, the modus operandi and the me
asures necessary to prevent frauds. It also cautions banks about unscrupulous bo
rrowers who have perpetrated frauds with other banks. (ii) Foreign Banks In Febr
uary 2005, the Government of India and the Reserve Bank released the Roadmap for
presence of Foreign Banks in India laying out a two-track and gradualist approach
aimed at increasing the efficiency and stability of the banking sector in India
. One track was the consolidation of the domestic banking system, both in privat
e and public sectors, and the second track was the gradual enhancement of the pr
esence of foreign banks in a synchronised manner. The roadmap was divided into t
wo phases, the first phase spanning the period March 2005 - March 2009, and the
second phase beginning April 2009 after a review of the experience gained in the
first phase. In view of the recent global financial market turmoil, there are u
ncertainties surrounding the financial strength of banks around the world. Furth
er, the 43

regulatory and supervisory policies at national and international levels are und
er review. In view of this, the current policy and procedures governing the pres
ence of foreign banks in India will continue. The proposed review will be taken
up after consultation with the stakeholders once there is greater clarity regard
ing stability, recovery of the global financial system and a shared understandin
g on the regulatory and supervisory architecture around the world. (iii) Financi
al Institutions Financial institutions are an important part of the Indian finan
cial system as they provide medium to long term finance to different sectors of
the economy. These institutions have been set up to meet the growing demands of
particular segments, such as, export, rural, housing and small industries. These
institutions have been playing a crucial role in channelising credit to the abo
ve sectors and addressing the challenges / issues faced by them. There are four
financial institutions - Exim Bank, National Bank for Agriculture and Rural Deve
lopment (NABARD), National Housing Bank (NHB) and Small Industries Development B
ank of India (SIDBI) which are under full-fledged regulation and supervision of
the Reserve Bank. As in the case of commercial banks, prudential norms relating
to income recognition, asset classification and provisioning, and capital adequa
cy ratio are applicable to these financial institutions as well. These instituti
ons also are subject to on-site inspection as well as off-site surveillance. (iv
) Rural Financing Institutions (A)
Rural Cooperative Banks Rural cooperati
ves occupy an important position in the Indian financial system. These were the
first formal institutions established to purvey credit to rural India. Thus far,
cooperatives have been a key instrument of financial inclusion in reaching out
to the last mile in rural areas. Cooperative banks are registered under the resp
ective State Co-operative Societies Act or Multi State Cooperative Societies Act
, 2002 and governed by the provisions of the respective acts. The legal characte
r, ownership, management, clientele and the role of state governments in the fun
ctioning of the cooperative banks make these institutions distinctively differen
t from commercial banks. The distinctive feature of the cooperative credit struc
ture in India is its heterogeneity.

Structure of Rural Cooperative Credit Institutions Rural cooperatives structure

is bifurcated into short-term and long-term structure. The short-term cooperativ
e structure is a three-tier structure with State Cooperative Banks (StCBs) at th
e apex (State) level, District Central Cooperative Banks (DCCBs) at the intermed
iate (district) level and Primary Agricultural Credit Societies (PACS) at the gr
ound (village) level. The shortterm structure caters primarily to the various sh
ort / medium-term production and marketing credit needs for agriculture. The lon
g-term cooperative structure has the State Cooperative Agriculture and Rural Dev
elopment Banks (SCARDBs) at the apex level and the Primary Cooperative Agricultu
re and Rural Development Banks (PCARDBs) at the district or block level. These i
nstitutions were conceived with the objective of meeting long-term credit needs
in agriculture. As on end-March 2008, there were 95,352 Short-term Rural Coopera
tive Credit Institutions (STCCIs). This included 31 StCBs, 371 DCCBs and 94,950
PACS. There were 717 Long Term Rural Cooperative Credit Institutions (LTCCIs) co
mprising 20 SCARDBs and 697 PCARDBs. Regulatory and Supervisory Framework While
regulation of State Cooperative Banks and District Central Cooperative Banks ves
ts with Reserve Bank, their supervision is carried out by National Bank for Agri
culture and Rural Development (NABARD). The Board of Supervision, a Committee of
the Board of Directors of NABARD, gives directions and guidance in respect of p
olicies and matters relating to supervision and inspection of StCBs and DCCBs. A
large number of StCBs as well as DCCBs are unlicensed and are allowed to functi
on as banks till they are either granted licence or their applications for licen
ce are rejected. The Committee on Financial Sector Assessment (Chairman: Dr. Rak
esh Mohan and Co-Chairman: Shri Ashok Chawla) had observed that there is a need
for a roadmap to ensure that only licenced banks operate in the cooperative spac
e and that banks which fail to obtain a licence by 2012 should not be allowed to
operate to expedite the process of consolidation and weeding out of non viable
entities from the cooperative space. A roadmap has been put in place to achieve
this position. Capital Adequacy Norms At present, the CRAR norms are not applica
ble to StCBs and DCCBs. However, since March 31, 2008, they are required to disc
lose the level of CRAR in the notes on accounts to their balance sheets every year
. The income recognition, asset classification and provisioning norms are applic
able as in the case of commercial banks. 45

Regional Rural Banks Regional Rural Banks were set up under the Regiona
l Rural Banks Act, 1976 with a view to developing the rural economy by providing
credit and other facilities, particularly to the small and marginal farmers, ag
ricultural labourers, artisans and small entrepreneurs. Being local level instit
utions, RRBs together with commercial and co-operative banks, were assigned a cr
itical role to play in the delivery of agriculture and rural credit. The equity
of the RRBs was contributed by the Central Government, concerned State Governmen
t and the sponsor bank in the proportion of 50:15:35. As of March 31, 2009, ther
e were 86 RRBs having a total of 15,107 branches. The function of financial regu
lation over RRBs is exercised by Reserve Bank and the supervisory powers have be
en vested with NABARD. CRAR norms are not applicable to RRBs. However, the incom
e recognition, asset classification and provisioning norms as applicable to comm
ercial banks are applicable to RRBs. (v) Urban Cooperative Banks Urban co-operat
ive banks play a significant role in providing banking services to the middle an
d lower income groups of society in urban and semi urban areas. The primary (urb
an) co-operative banks (UCBs), like other co-operative societies, are registered
under the respective State Co-operative Societies Act or Multi State Cooperativ
e Societies Act, 2002 and governed by the provisions of the respective acts. Wit
h a view to bringing primary (urban) co-operative banks under the purview of the
Banking Regulation Act, 1949, certain provisions of the Banking Regulation Act,
1949 were made applicable to co-operative banks effective March 1, 1966. With t
his, these banks came under the dual control of respective State Governments/Cen
tral Government and the Reserve Bank. While the non-banking aspects like registr
ation, management, administration and recruitment, amalgamation and liquidation
are regulated by the State/ Central Governments, matters related to banking are
regulated and supervised by the Reserve Bank under the Banking Regulation Act, 1
949 (as applicable to co-operative societies). As of March 31, 2009, there were
1721 primary (urban) co-operative banks including 53 scheduled banks. The UCBs a
re largely concentrated in a few States, such as, Andhra Pradesh, Gujarat, Karna
taka, Maharashtra and Tamil Nadu. Apart from a few large banks, most of the UCBs
are often functioning as a unit bank. 46

(A) Regulatory Framework

UCBs have to obtain a licence f
rom the Reserve Bank for doing banking business. The unlicensed primary (urb
an) co-operative banks can
continue to carry on banking business till they
are refused a licence.
Further UCBs also have to obtain prior authoris
ation of the Reserve Bank
to open a new place of business.
Prudential Norms Prudential norms relating to income recognitio
n, asset classification, provisioning and capital adequacy ratio are applicable
to urban co-operative banks as well.
(B) Supervisory Framework
To ensure that primary (urban) co-operative ban
ks function on sound
lines and their methods of operation are consistent wit
h statutory
provisions and are not detrimental to the interests of deposito
rs, they are
subject to (i) on-site inspection, and (ii) off-site surveillan
On-site Inspection The principal objective of i
nspection of primary (urban) co-operative banks is to safeguard the interests of
depositors and to build and maintain a sound banking system in conformity with
the banking laws and regulations. While all scheduled urban co-operative banks,
and select non-scheduled urban co-operative banks are inspected on an annual bas
is, other non-scheduled UCBs are inspected once in two years. The banks are grad
ed into four categories based on four parameters viz., CRAR, net NPA, profitabil
ity and compliance with CRR/SLR stipulations. Off-site Surveillance In order to
have continuous supervision over the UCBs, the Reserve Bank has supplemented the
system of periodic on-site inspection with off-site surveillance (OSS) through
a set of periodical prudential returns to be submitted by UCBs.
Non-Banking Financial Companies (NBFCs) Non-banking Financial Companies play an
important role in the financial system. An NBFC is defined as a company engaged
in the business of lending, investment in shares and securities, hire purchase,
chit fund, insurance or collection of monies. Depending upon the line of activit
y, NBFCs are 47

categorised into different types. Recognising the growth in the sector, initiall
y the regulatory set-up primarily focused on the deposit taking activity in term
s of limits and interest rate. The recommendations of the Joint Parliamentary Co
mmittee which looked into the stock market scam of early 90s and the Shah Commit
tee (1992) suggested that there was a need to expand the regulatory and supervis
ory focus also to the asset side of NBFCs balance sheet. Legislative amendments w
ere adopted to empower the Reserve Bank to regulate Non-Banking Financial Compan
ies to ensure that they integrate their functioning within the Indian financial
system. The amended Act provides that for commencing /carrying on the business o
f Non Banking Financial Institution(NBFI), a company has to have a minimum level
of Net Owned Funds (NoF). At end- June 2009 there were 12,740 NBFCs. Out of thes
e, 336 have been permitted to accept deposits and are classified as NBFC-D. The
non-deposit taking companies are classified as NBFC-ND. (A) Regulatory Framework
NBFCs accepting Public Deposits The Reserve Bank issues directions about the qu
antum of public deposits that can be accepted, the period of deposits, which sho
uld not be less than 12 months and should not exceed 60 months, the maximum rate
of interest payable on such deposits (presently 12.5 per cent), brokerage fees
and other expenses amounting to a maximum of 2 per cent and 0.5 per cent of the
deposits, respectively, and the contents of the application forms, as well as th
e advertisement for soliciting deposits. Companies which accept public deposits
are required to comply with all the prudential norms on income recognition, asse
t classification, accounting standards, provisioning for bad and doubtful debts,
capital adequacy, credit and investment concentration. Additional disclosures i
n balance sheets have also been prescribed. In order to restrict indiscriminate
investment by Non-Banking Financial Companies in real estate and in unquoted sha
res, they have been directed to limit their investment in real estate, except fo
r their own use, up to 10 per cent of their owned funds. Further, a ceiling of 2
0 per cent has also been prescribed for investment in unquoted shares of other t
han group / subsidiary companies. 48

In case an NBFC defaults in the payment of matured deposits, the depositors can
lodge their claims against the Company with the Company Law Board (CLB). NBFCs a
lso have to maintain SLR (15 per cent) as a percentage of deposits. However, the
re is no CRR prescription for NBFCs as they do not accept demand deposits. NBFCs
not accepting Public Deposits Non-Banking Financial Companies not accepting pub
lic deposits are regulated in a limited manner. However, with the opening up of
foreign direct investment in NBFCs and the opportunities for credit growth in th
e economy, the sector has witnessed the entry of some large companies in the cat
egory of NBFC-ND. Since these companies, unlike the NBFC-D,were earlier not subj
ect to prudential norms for capital adequacy and exposures, their borrowings inc
reased considerably. Further, since, unlike banks, the NBFC sector does not have
any cap on exposure to the capital market, these entities have, as a part of th
eir business, been taking significant exposure on the capital market. In view of
the above, non-deposit taking NBFCs with asset size of Rs 100 crore and above w
ere classified as Systemically Important and were required to comply with exposu
re and capital adequacy norms . To facilitate off-site supervision, they are als
o required to provide additional information to the Reserve Bank through monthly
and annual returns. Further, to contain the risks of the NBFC sector spilling o
ver to the banking sector, exposure of banks to the NBFC sector, either in the f
orm of credit facilities or in the form of equity contribution has been prudenti
ally capped. (B) Supervisory Framework On-Site Inspection All NBFC-D and all lar
ge NBFC NDs are subjected to regular annual inspection to assess their financial
performance and the general compliance with the directions issued by the Reserv
e Bank. The inspection focuses on Capital, Asset Quality, Management, Earnings,
Liquidity and Systems (CAMELS pattern) and identifies the supervisory concerns.
These are taken up with the respective institutions for remedial action. Off-Sit
e Surveillance System In order to supplement information between on-site inspect
ions, several returns have been prescribed for NBFCs as part of the off-site sur
veillance system. The information provided is analysed to identify potential sup
ervisory concerns and in certain cases serves as a trigger for on-site inspectio

External Auditing The responsibility of ensuring compliance with the directions

issued by the Reserve Bank, as well as adherence to the provisions of the RBI Ac
t has also been entrusted to the statutory auditors of the Non-Banking Financial
Companies. The statutory auditors are required to report to the Reserve Bank ab
out any irregularity or violation of regulations concerning acceptance of public
deposits, credit rating, prudential norms and exposure limits, capital adequacy
, maintenance of liquid assets and regularisation of excess deposits held by the
companies. (vii) Primary Dealers In 1995, the Reserve Bank introduced the syste
m of Primary Dealers (PDs) in the Government Securities Market, which comprised
independent entities undertaking Primary Dealer activity. PDs play an active rol
e in the Government securities market by underwriting and bidding for fresh issu
ances and acting as market makers for these securities. In order to broaden the
Primary Dealership system, banks were permitted to undertake Primary Dealership
business departmentally in 2006-07. Further, the standalone PDs were permitted t
o diversify into business activities, other than the core PD business, in 2006-0
7, subject to certain conditions. As on June 30, 2009, there were six standalone
PDs and eleven banks authorised to undertake PD business departmentally. Regulat
ion PDs are required to meet registration and such other requirements as stipula
ted by the Securities and Exchange Board of India (SEBI) including operations on
the Stock Exchanges, if they undertake any activity regulated by SEBI. PDs are
expected to join the Primary Dealers Association of India (PDAI) and the Fixed I
ncome Money Market and Derivatives Association (FIMMDA) and abide by the code of
conduct and such other actions as initiated by these Associations in the intere
st of the securities markets. Any change in the shareholding pattern / capital s
tructure of a PD needs prior approval of the Reserve Bank. The Reserve Bank rese
rves the right to cancel the Primary Dealership if, in its view, the concerned i
nstitution has failed to adhere to the terms of authorisation or any other appli
cable guideline. A Primary Dealer should bring to the Reserve Banks attention any
major complaint against it or action initiated/taken against it by the Stock Ex
changes, SEBI, CBI, Enforcement Directorate, Income Tax, or any other authority.

Supervision Off-site supervision: PDs are required to submit to the Reserve Bank,
periodic returns which are analysed to identify any concerns. On-site inspectio
n: The Reserve Bank has the right to inspect the books, records, documents and a
ccounts of the PD. PDs are required to make available all such documents and reco
rds to the Reserve Bank officers and render all necessary assistance as and when
required. (viii) Credit Information Companies Credit Information Companies (CIC
) play an important role in facilitating credit to various borrowers on the basi
s of their track record. Credit Information Companies (Regulation) Act 2005 empo
wers the Reserve Bank to regulate CICs. The Reserve Bank announced in November 2
008 that Foreign Direct Investment up to 49 per cent in CICs would be considered
in cases: (a) where the investor was a company with an established track record
of running a credit information bureau in a well regulated environment; (b) no
shareholder in the investor company held more than 10 per cent voting rights in
that company; and (c) preferably, the company was a listed company on a recognis
ed stock exchange. The Reserve Bank, in April 2009, issued inprinciple approval to
four companies to set up CICs. (ix) Financial Markets Deep and efficient financ
ial markets are essential for realising the growth potential of an economy; howe
ver, disorderly financial markets could be a source of risk to both financial in
stitutions and the economy. The Reserve Bank regulates only certain segments of
financial markets, namely, the money market, the government securities market an
d the foreign exchange market. Various measures have been taken to deepen these
markets over a period of time.

Foreign Exchange Reserves Management
A proportional reserve system required gold and forex reserves to be a minimum 4
0 percent of currency issued
India faces balance of payment crises, pledges gold to shore up reserves
The Reserve Bank purchased 200 mts of gold under IMFs limited gold sales programm
The Reserve Bank, as the custodian of the countrys foreign exchange reserves, is
vested with the responsibility of managing their investment. The legal provision
s governing management of foreign exchange reserves are laid down in the Reserve
Bank of India Act, 1934. The Reserve Banks reserves management function has in r
ecent years grown both in terms of importance and sophistication for two main re
asons. First, the share of foreign currency assets in the balance sheet of the R
eserve Bank has substantially increased. Second, with the increased volatility i
n exchange and interest rates in the global market, the task of preserving the v
alue of reserves and obtaining a reasonable return on them has become challengin
g. The basic parameters of the Reserve Banks policies for foreign exchange reserv
es management are safety, liquidity and returns.

Within this framework, the Reserve Bank focuses on: a) Maintaining markets conf
idence in monetary and exchange rate policies. b)
Enhancing the Reserve B
anks intervention capacity to stabilise foreign
exchange markets. c)
g external vulnerability by maintaining foreign currency liquidity
to abso
rb shocks during times of crisis, including national disasters or
cies. d)
Providing confidence to the markets that external obligations c
an always
be met, thus reducing the costs at which foreign exchange resou
rces are
available to market participants. e)
Adding to the comfort o
f market participants by demonstrating the
backing of domestic currency by
external assets. Investment of Reserves: The Reserve Bank of India Act permits
the Reserve Bank to invest the reserves in the following types of instruments: 1
Deposits with Bank for International Settlements and other central bank
s 2)
Deposits with foreign commercial banks 3)
Debt instruments repres
enting sovereign or sovereign-guaranteed liability of
not more than 10 years
of residual maturity 4) Other instruments and institutions as approved by the C
entral Board of the
Reserve Bank in accordance with the provisions of the A
ct 5)
Certain types of derivatives
While safety and liquidity continue to be the twin-pillars of reserves managemen
t, return optimisation has become an embedded strategy within this framework. Th
e Reserve Bank has framed policy guidelines stipulating stringent eligibility cr
iteria for issuers, counterparties, and investments to be made with them to enha
nce the safety and liquidity of reserves. The Reserve Bank, in consultation with
the Government, continuously reviews the reserves management strategies. Deploy
ment of Reserves The foreign exchange reserves include foreign currency assets (
FCA), Special Drawing Rights (SDRs) and gold. SDRs are held by the Government of
India. The foreign currency assets are managed following the principles of port
folio management. In deploying reserves, the Reserve Bank pays close attention t
o currency 53
Box 8

composition, interest rate risk and liquidity needs. All foreign currency assets
are invested in assets of top quality and a good proportion is convertible into
cash at short notice. The counterparties with whom deals are conducted are also
subject to a rigorous selection process. In assessing the returns from deployme
nt, the total return (both interest and capital gains) is taken into considerati
on. One crucial area in the process of investment of the foreign currency assets
in the overseas markets relates to the risks involved in the process. While the
re is no set formula to meet all situations, the Reserve Bank follows the accept
ed portfolio management principles for risk management.
Foreign Exchange Reserves Management: The RBIs Approach The Reserve Banks approach
to foreign exchange reserves management has also undergone a change. Until the
balance of payments crisis of 1991, Indias approach to foreign exchange reserves
was essentially aimed at maintaining an appropriate import cover. The approach u
nderwent a paradigm shift following the recommendations of the High Level Commit
tee on Balance of Payments chaired by Dr. C. Rangarajan (1993). The committee st
ressed the need to maintain sufficient reserves to meet all external payment obl
igations, ensure a reasonable level of confidence in the international community
about Indias capacity to honour its obligations, and counter speculative tendenc
ies in the market. After the introduction of system of market-determined exchang
e rates in 1993, the objective of smoothening out the volatility in the exchange
rates assumed importance. The overall approach to the management of foreign exc
hange reserves also reflects the changing composition of Balance of Payments (Bo
P) and liquidity risks associated with different types of flows. In 1997, the Re
port of the Committee on Capital Account Convertibility under the chairmanship o
f Shri S.S. Tarapore, suggested alternative measures for adequacy of reserves. T
he committee in addition to trade-based indicators also suggested money-based an
d debt-based indicators. Similar views have been held by the Committee on Fuller
Capital Account Convertibility (Chairman: Shri S. S. Tarapore, July 2006).
Box 9
The traditional approach of assessing reserve adequacy in terms of import cover
has been widened to include a number of parameters about the size, composition,
and risk profiles of various types of capital flows. The Reserve Bank also looks
at the types of external shocks to which the economy is potentially vulnerable.
The objective is to ensure that the quantum of reserves is in line with the gro
wth potential of the economy, the size of risk-adjusted capital flows and nation
al security requirements.

9 Foreign Exchange Management

The Reserve Bank oversees the foreign exchange market in India. It supervises an
d regulates it through the provisions of the Foreign Exchange Management Act, 19
99. Like other markets, the foreign exchange market has also evolved over time,
and the Reserve Bank has been modulating its approach towards its function of su
pervising the market. Evolution For a long time, foreign exchange in India was t
reated as a controlled commodity because of its limited availability. The early
stages of foreign exchange management in the country focused on control of forei
gn exchange by regulating the demand due to limited supply. Exchange control was
introduced in India under the Defence of India Rules on September 3, 1939 on a
temporary basis. The statutory power for exchange control was provided by the Fo
reign Exchange Regulation Act (FERA) of 1947, which was subsequently replaced by
a more comprehensive Foreign Exchange Regulation Act, 1973. This Act empowered
the Reserve Bank, and in certain cases the Central Government, to control and re
gulate dealings in foreign exchange payments outside India, export and import of
currency notes and bullion, transfer of securities between 55

residents and non-residents, acquisition of foreign securities, and acquisition

of immovable property in and outside India, among other transactions. Extensive
relaxations in the rules governing foreign exchange were initiated, prompted by
the liberalisation measures introduced since 1991 and the Act was amended as a n
ew Foreign Exchange Regulation (Amendment) Act 1993. Significant developments in
the external sector, such as, substantial increase in foreign exchange reserves
, growth in foreign trade, rationalisation of tariffs, current account convertib
ility, liberalisation of Indian investments abroad, increased access to external
commercial borrowings by Indian corporates and participation of foreign institu
tional investors in Indian stock market, resulted in a changed environment. Keep
ing in view the changed environment, the Foreign Exchange Management Act (FEMA)
was enacted in 1999 to replace FERA with effect from June 1, 2000. FEMA aimed at
consolidating and amending the laws relating to foreign exchange with the objec
tive of facilitating external trade and payments and for promoting the orderly d
evelopment and maintenance of foreign exchange markets in India. Emphasising the
shift in focus, the Reserve Bank in due course also amended (since January 31,
2004) the name of its department dealing with the foreign exchange transactions
to Foreign Exchange Department from Exchange Control Department. Liberalised App
roach The Reserve Bank issues licences to banks and other institutions to act as
Authorised Dealers in the foreign exchange market. In keeping with the move tow
ards liberalisation, the Reserve Bank has undertaken substantial elimination of
licensing, quantitative restrictions and other regulatory and discretionary cont
rols. Apart from easing restrictions on foreign exchange transactions in terms o
f processes and procedure, the Reserve Bank has also provided the exchange facil
ity for liberalised travel abroad for purposes, such as, conducting business, at
tending international conferences, undertaking technical study tours, setting up
joint ventures abroad, negotiating foreign collaboration, pursuing higher studi
es and training, and also for medical treatment. Moreover, the Reserve Bank has
permitted residents to hold foreign currency up to a maximum of USD 2,000 or its
equivalent. Residents can now also open foreign currency accounts in India and
credit specified foreign exchange receipts into it. 56

Foreign Investment Foreign investment comes into India in various forms. Followi
ng the reforms path, the Reserve Bank has liberalised the provisions relating to
such investments.

The Reserve Bank has permitted foreign investment in almost all sectors, with a
few exceptions. Foreign companies are permitted to set up 100 per cent subsidiar
ies in India. In many sectors, no prior approval from the Government or the Rese
rve Bank is required for non-residents investing in India. Foreign institutional
investors are allowed to invest in all equity securities traded in the primary
and secondary markets. The total investment by all the foreign institutional inv
estors put together should not exceed 24 per cent of the issued and paid up capi
tal of a company which can be raised up to the level of the prescribed sectoral
cap by the respective companies by passing a special resolution to the effect. F
oreign institutional investors have also been permitted to invest in Government
of India treasury bills and dated securities, corporate debt instruments and mut
ual funds. The NRIs have the flexibility of investing under the options of repat
riation and non-repatriation. The Government allows Indian companies to issue Gl
obal Depository Receipts (GDRs) and American Depository Receipts (ADRs) to forei
gn investors The GDRs/ADRs issued by Indian companies to non-residents have free
convertibility outside India.
Indian Investment Abroad Any Indian entity can make investment in an overseas jo
int venture or in a wholly-owned subsidiary, up to 400 per cent of its net-worth
. External Commercial Borrowings Indian companies are allowed to raise external
commercial borrowings including commercial-bank loans, buyers credit, suppliers cr
edit, and securitised instruments. Foreign Currency Convertible Bonds (FCCBs) an
d Foreign Currency Exchangeable Bonds (FCEBs) are also governed by the ECB guide

Liberalised Remittance Scheme As a step towards further simplification and liber

alisation of the foreign exchange facilities available to the residents, the Res
erve Bank has permitted resident individuals to freely remit abroad up to USD 20
0,000 per financial year for any permissible purposes. Currency Futures In a rec
ent development, regulators have permitted exchange-traded currency futures in I
ndia. Such trading facilities are currently being offered by the National Stock
Exchange, the Bombay Stock Exchange and the MCX-Stock Exchange. As the product i
s exchange traded, the conduct of currency futures trading facility is being reg
ulated jointly by the Reserve Bank and the Securities and Exchange Board of Indi
a. Indian Depository Receipts (IDRs) Under another reform measure, authorities i
n India have allowed eligible companies resident outside India to issue Indian D
epository Receipts (IDRs) through a domestic depository. Such issuances are subj
ect to approval of the sectoral regulators. Exchange Rate Policy The foreign exc
hange market in India comprises Authorised Persons (banks, money changers and ot
her entities) in foreign exchange business, foreign exchange brokers who act as
intermediaries and customers individuals as well as corporates who need foreign
exchange for their transactions. The customer segment is dominated by major publ
ic sector entities and Government of India (for civil debt service and defence )
on the one hand and large private sector corporates on the other. Foreign Insti
tutional Investors (FIIs) have emerged as an important constituent in the equity
market and thus contribute significantly to the foreign exchange market activit
y. The Indian foreign exchange market primarily comprises two segments the spot
market and the derivatives market. As in other emerging market economies, the sp
ot market is the dominant segment of the Indian foreign exchange market. Indias e
xchange rate policy has evolved in tandem with the domestic as well as internati
onal developments. The period after independence was marked by a fixed exchange
rate regime, which was in line with the Bretton Woods system prevalent then. The
Indian Rupee was pegged to the Pound Sterling on account of historic links with
Britain. After the breakdown of Bretton Woods System in the early seventies, mo
st of the countries moved towards a system of flexible/managed exchange rates. W
ith the decline in the share 58

of Britain in Indias trade, increased diversification of Indias international tran

sactions together with the weaknesses of pegging to a single currency, the India
n Rupee was de-linked from the Pound Sterling in September 1975. The exchange ra
te subsequently came to be determined with reference to the daily exchange rate
movements of an undisclosed basket of currencies of Indias major trading partners
. As the basket-linked management of the exchange rate of the Rupee did not capt
ure the market dynamics and the developments in the exchange rates of competing
countries fully, the Rupees external value was allowed to be determined by market
forces in a phased manner following the balance of payment difficulties in the
nineties. A significant two-step downward adjustment in the exchange rate of the
Rupee was made in 1991. In March 1992, Liberalised Exchange Rate Management Sys
tem (LERMS) involving the dual exchange rate was instituted. A unified single ma
rket-determined exchange rate system based on the demand for and supply of forei
gn exchange replaced the LERMS effective March 1, 1993. The Reserve Banks exchang
e rate policy focuses on ensuring orderly conditions in the foreign exchange mar
ket. For the purpose, it closely monitors the developments in the financial mark
ets at home and abroad. When necessary, it intervenes in the market by buying or
selling foreign currencies. The market operations are undertaken either directl
y or through public sector banks. In addition to the traditional instruments lik
e forward and swap contracts, the Reserve Bank has facilitated increased availab
ility of derivative instruments in the foreign exchange market. It has allowed t
rading in Rupee-foreign currency swaps, foreign currency-Rupee options, cross-cu
rrency options, interest rate swaps and currency swaps, forward rate agreements
and currency futures.

10 Market Operations
The Reserve Bank oprationalises its monetary policy through its operations in go
vernment securities , foreign exchange and money markets. Monetary Operations Op
en Market Operations Open Market Operations in the form of outright purchase/sal
e of Government securities are an important tool of the Reserve Banks monetary ma
nagement. The Bank carries out such operations in the secondary market on the el
ectronic Negotiated Dealing System Order Matching (NDS-OM) platform by placing b
ids and/or taking the offers for securities. All the secondary market transactio
ns in Government Securities are settled through Clearing Corporation of India Li
mited (CCIL). The entire settlement is under Delivery versus Payment mode. The n
etted funds settlement is carried out through members Current Account maintained
at the Reserve Bank and through Designated Settlement Bank for those members who
do not maintain current account with the Reserve Bank. The securities settlemen
t is done in SGL/ CSGL Accounts of members maintained at the central bank. CCIL
acts as central counter party to all Government securities trade facilitating sm
ooth 60

settlement and also guaranteeing settlement, thus reducing gridlocks and mitigat
ing cascading impact that default by one member could have on the system. Liquid
ity Adjustment Facility Auctions The liquidity management operations are aimed a
t modulating liquidity conditions such that the overnight rates in the money mar
ket remains within the informal corridor set by the repo and reverse repo rates
for the liquidity adjustment facility (LAF) operations. In a repo transaction, t
he Reserve Bank infuses liquidity into the system by taking securities as collat
eral, while in a reverse repo transaction it absorbs liquidity from the system w
ith the Reserve Bank providing securities to the counter parties. The LAF auctio
ns are also conducted electronically with the market participants, such as, bank
s and Primary Dealers. The LAF auctions are conducted either only once or two ti
mes in a day with the operations effectively modulating overnight liquidity cond
itions in the market. Market Stabilisation Scheme The Market Stabilisation Schem
e (MSS) was introduced in April 2004 under which Government of India dated secur
ities / treasury bills could be issued to absorb surplus structural / durable li
quidity created by the Reserve Banks foreign exchange operations. MSS operations
are a sterilisation tool used for offsetting the liquidity impact created by int
ervention in the foreign exchange markets. The dated securities / treasury bills
are the same as those issued for normal market borrowings for avoiding segmenta
tion of the market. The MoU between the Reserve Bank and the Government of India
envisaged an annual ceiling, to be fixed through mutual consultations, for MSS
operations along with a threshold which would trigger a review of the ceiling. T
he issuances under MSS are matched by an equivalent cash balance held by the Gov
ernment in a separate identifiable cash account maintained and operated by the R
eserve Bank. While these issuances do not provide budgetary support to the Gover
nment, interest costs are borne by the Government. These securities are also tra
ded in the secondary market. By design, the MSS has the flexibility of not only
absorbing liquidity but also of injecting liquidity, if required, through unwind
ing as well as buy-back of securities issued under the MSS. Domestic Foreign Exc
hange Market Operations Operations in the domestic foreign exchange markets are
conducted within the Reserve Banks framework of exchange rate management policy.
The exchange rate management policy in recent years has been guided by the broad
principles of careful monitoring and management of exchange rates 61

with flexibility, without a fixed target or a pre-announced target or a band cou

pled with the ability to intervene if and when necessary. It also allows underly
ing demand and supply conditions to determine the exchange rate movements over a
period in an orderly way. Subject to this predominant objective, the exchange r
ate management policy is guided by the need to reduce excess volatility, prevent
the emergence of destabilising speculative activities, help maintain adequate l
evel of reserves and develop an orderly foreign exchange market. The Reserve Ban
k also collates, computes and disseminates RBI Reference rate on daily basis. Mo
ney Market The Reserve Bank also carries out regulation and development of money
market instruments such as call / notice / term money market, repo market, cert
ificate of deposit, commercial paper and Collateralised Borrowing and Lending Ob
ligations (CBLO). The call / notice / term money market operations are transacte
d / reported on the Negotiated Dealing System Call (NDS Call) platform.

11 Payment and Settlement Systems

The regulation and supervision of payment systems is being increasingly recognis
ed as a core responsibility of central banks. Safe and efficient functioning of
these systems is an important pre-requisite for the proper functioning of the fi
nancial system and the efficient transmission of monetary policy. The Reserve Ba
nk, as the regulator of financial systems, has been initiating reforms in the pa
yment and settlement systems to ensure efficient and faster flow of funds among
various constituents of the financial sector. The increasing monetisation in the
economy, the countrys large geographic expanse, peoples preference for paper-base
d instruments and rapid changes in technology are among factors that make this t
ask a formidable one. Development, Consolidation and Integration The Reserve Ban
k has adopted a three-pronged strategy of consolidation, development and integra
tion to establish a modern and robust payment and settlement system which is als
o efficient and secure. 63

The consolidation revolves around expanding the reach of the existing products b
y introducing clearing process in new locations. The reach is also facilitated b
y the use of latest technology, such as, mechanised cheque processing, image-bas
ed cheque processing systems, and interconnection of the clearing houses. The Re
serve Bank has also taken steps towards integrating the payment system with the
settelement systems for government securities and foreign exchange. To facilitat
e settlement of Government securities transactions, it created the Negotiated De
aling System, a screen-based trading platform. The NDS facilitates the dealing p
rocess and provides for electronic reporting of trades, on-line information diss
emination and settlement in a centralised system. For settlement of trade in for
eign exchange, Government securities and other debt instrument, it has set up th
e Clearing Corporation of India Limited (CCIL). This plays the role of a central
counter party to transactions and guarantees settlement of trade, thus managing
the counter party risk. Payment and Settlement System: Evolution and Initiative
Computerisation of clearing operations was the first major step towards
modernisation of the payments system, its aim being to reduce the time
taken in clearing, balancing and settlement, apart from providing accuracy in
the final settlement.
Mechanisation of the clearing operations was another mi
lestone with the
introduction of Magnetic Ink Character Recognition (MIC
R)-based cheque processing technology using High Speed Reader Sorter systems dr
iven by
mainframe computers. The Reserve Bank introduced mechanised cle
aring in
the four metro cities of Mumbai, New Delhi, Kolkata and Chennai
during 1986.
To facilitate faster clearing of large-value cheques (of value
of rupees one
lakh and above), the Reserve Bank introduced High-Value Clearing
(HVC), covering select branches of banks for same day settlement. However, wit
the development of other electronic modes of transfer and to encourage
customers to move from paper-based modes to electronic products, the
Bank has advised the clearing houses to gradually discontinue its use.
The Res
erve Bank has also introduced a Cheque Truncation System (CTS)
in the National
Capital Territory of New Delhi. This system eliminates the
physical moveme
nt of cheques and provides a more secure and efficient method for clearing che
The Reserve Bank has introduced Electronic Clearing Service (ECS). This
uses a series of electronic payment instructions for transfer of funds
Box 10 64

of paper instruments. The ECSCredit enables companies to pay interest or dividend t

o a large number of beneficiaries by direct credit of the amount to their bank a
ccounts. ECS-Debit facilitates payment of charges to utility services, such as, el
ectricity, telephone companies, payment of insurance premia and loan installment
s., directly by debit to the customers account with a bank. The National Electron
ic Clearing Service (NECS), facilitates credits to bank accounts of multiple cus
tomers against a single debit of remitters account. NECS (Debit) when launched wo
uld facilitate multiple debits to destination account holders against a single c
redit to the sponsor bank. The system has a pan-India characteristic leveraging
on Core Banking Solutions (CBS) of member banks, facilitating all CBS bank branc
hes to participate in the system, irrespective of their location. As at the end
of September 2009 as many as 114 banks with 30,780 branches were participating i
n NECS. The Reserve Bank has introduced an Electronic Funds Transfer scheme to e
nable an account holder of a bank to electronically transfer funds to another ac
count holder with any other participating bank. The Real Time Gross Settlement s
ystem settles all inter-bank payments and customer transactions above rupees one
lakh. Participants in this system include banks, financial institutions, primar
y dealers and clearing entities. All systemically important payments including s
ecurities settlement, forex settlement and money market settlements are processe
d through the RTGS system. Pre-paid payment instruments facilitate purchase of g
oods and services against the value stored on these instruments. To encourage th
e use of this safe payment mechanism, the Reserve Bank has issued guidelines tha
t lay down the basic eligibility criteria and the conditions for operating such
payment systems in the country. The Reserve Bank has also issued guidelines for
the use of mobile phones as a medium for providing banking services. Only banks
which are licensed and supervised in India and have a physical presence in India
are permitted to offer mobile banking services in the country. The guidelines f
ocus on systems for security and inter-bank transfer arrangements through author
ised systems. The Reserve Bank encouraged the setting up of the National Payment
s Corporation of India (NPCI) to act as an umbrella organisation for operating t
he various retail payment systems in India. NPCI is expected to bring greater ef
ficiency in retail payment by way of uniformity and standardisation as also expa
nsion of reach and innovative payment products to augment customer convenience.

Legal Framework The Payment and Settlement Systems Act, 2007 provides for regula
tion and supervision of payment systems in India and designates the Reserve Bank
as the authority for the purpose. As per the Act, only payment systems authoris
ed by the Reserve Bank can be operated in the country. The Act also provides for
the settlement effected under the rules and procedures of the system provider t
o be treated as final and irrevocable. Institutional Framework The Reserve Bank
has put in place an institutional framework and structure for oversight of the p
ayment systems. In 2005, it created a Board for Regulation and Supervision of Pa
yment and Settlement Systems (BPSS) as a Committee of the Central Board. A new d
epartment called the Department of Payment and Settlement Systems (DPSS) was con
stituted to assist the BPSS in performing its functions.

12 Developmental Role
The Reserve Bank is one of the few central banks that has taken an active and di
rect role in supporting developmental activities in their country. The Reserve B
anks developmental role includes ensuring credit to productive sectors of the eco
nomy, creating institutions to build financial infrastructure, and expanding acc
ess to affordable financial services. Over the years, its developmental role has
extended to institution building for facilitating the availability of diversifi
ed financial services within the country. The Reserve Bank today also plays an a
ctive role in encouraging efficient customer service throughout the banking indu
stry, as well as extension of banking service to all, through the thrust on fina
ncial inclusion. Towards this goal, which has evolved over many years, the Reser
ve Bank has taken various initiatives. Rural Credit Given the predominantly agra
rian character of the Indian economy, the Reserve Banks role has been to ensure t
imely and adequate credit to the 67

agricultural sector at affordable cost. Section 54 of the RBI Act, 1934 states t
hat the Bank may maintain expert staff to study various aspects of rural credit
and development and in particular, it may tender expert guidance and assistance
to the National Bank (NABARD) and conduct special studies in such areas as it ma
y consider necessary to do so for promoting integrated rural development. Priori
ty Sector Lending The focus on priority sectors can be traced to the Reserve Ban
ks credit policy for the year 1967-68, and institution of a scheme of social contr
ol over commercial banks in 1967 by the Government of India to remove certain def
iciencies observed in the functioning of the banking system, such as, bulk of ba
nk advances directed to large and medium-scale industries and established busine
ss houses. In order to provide access to credit to the neglected sectors, a targ
et based priority sector lending was introduced from the year 1974, initially wi
th public sector banks. The scheme was gradually extended to all commercial bank
s by 1992. The scope and extent of priority sectors have undergone several chang
es since the formalisation of description of the priority sectors in 1972. The g
uidelines on lending to priority sector were revised with effect from April 30,
2007. The guiding principle of the revised guidelines on lending to priority sec
tor has been to ensure adequate flow of bank credit tothose sectors of the societ
y/ economythat impact large segments of the population and weaker sections, and t
o the sectors which are employment-intensive, such as, agriculture and small ent
erprises. The broad categories of advances under priority sector now include agr
iculture, micro and small enterprises sector, microcredit, education and housing

Targets for Lending to the Priority Sector

Domestic Commercial Banks Total priority sector advances 40 per cent of Adjusted
Net Bank Credit (ANBC) [Net Bank Credit plus investments made by banks in nonSL
R bonds held in held to maturity (HTM) category] or credit equivalent amount of
Off-Balance Sheet Exposure, whichever is higher. 18 per cent of ANBC or credit e
quivalent amount of OffBalance Sheet Exposure, whichever is higher. Of this, ind
irect lending in excess of 4.5 per cent of ANBC or credit equivalent amount of O
ff-Balance Sheet Exposure, whichever is higher, will not be reckoned for computi
ng performance under 18 per cent target. However, all agricultural advances unde
r the categories direct and indirect will be reckoned in computing performance under
the overall priority sector target of 40 per cent of ANBC or credit equivalent
amount of OffBalance Sheet Exposure, whichever is higher. Advances to small ente
rprises sector will be reckoned in computing performance under the overall prior
ity sector target of 40 per cent of ANBC or credit equivalent amount of Off-Bala
nce Sheet Exposure, whichever is higher. (i) 40 per cent of total advances to sm
all enterprises sector should go to micro (manufacturing) enterprises having inv
estment in plant and machinery up to Rs 5 lakh and micro (service) enterprises h
aving investment in equipment up to Rs. 2 lakh; (ii) 20 per cent of total advanc
es to small enterprises sector should go to micro (manufacturing) enterprises wi
th investment in plant and machinery above Rs 5 lakh and up to Rs. 25 lakh, and
micro (service) enterprises with investment in equipment above Rs. 2 lakh and up
to Rs. 10 lakh. (Thus, 60 per cent of small enterprises advances should go to t
he micro enterprises). Export credit is not a part of priority sector for domest
ic commercial banks. Foreign Banks 32 per cent of ANBC or credit equivalent amou
nt of Off-Balance Sheet Exposure, whichever is higher. No target.
Total agricultural advances
Small enterprise advances
10 per cent of ANBC or credit equivalent amount of Off-Balance Sheet Exposure, w
hichever is higher Same as for domestic banks
Micro enterprises within small enterprises sector
Export credit
12 per cent of ANBC or credit equivalent amount of Off-Balance Sheet Exposure, w
hichever is higher No target
Advances to weaker sections Differential rate of interest scheme
10 per cent of ANBC or credit equivalent amount of OffBalance Sheet Exposure, wh
ichever is higher. 1 per cent of total advances outstanding as at the end of the
previous year. It should be ensured that not less than 40 per cent of the total
advances granted under DRI scheme goes to scheduled caste / scheduled tribes. A
t least two third of DRI advances should be granted through rural and semi-urban
No target

The domestic scheduled commercial banks, both in the public and private sector,
having shortfall in lending to priority sector and/or agricultural lending and/o
r weaker section lending targets, are required to deposit in Rural Infrastructur
e Development Fund (RIDF) established with NABARD or other Funds set up with oth
er financial institutions. RIDF was established with NABARD in April 1995 to ass
ist State Governments / State-owned corporations in quick completion of projects
relating to irrigation, soil conservation, watershed management and other forms
of rural infrastructure (such as, rural roads and bridges, market yards, etc.).
Since then, the RIDF has been extended on a year-to-year basis to presently RID
F XV through announcements in the Union Budgets. The interest rates charged from
State Governments and payable to banks under the Rural Infrastructure Developme
nt Fund (RIDF) have been brought down over the years in accordance with the redu
ction of market interest rates. As a measure of disincentive for non-achievement
of agricultural lending target, effective RIDF-VII, the rate of interest on RID
F deposits has been linked to the banks performance in lending to agriculture. Ac
cordingly, while the State Governments are required to pay interest at Bank Rate
plus 0.5 percentage points, the rates of interest on deposits vary between Bank
Rate and Bank Rate minus 3 percentage points depending on the individual banks s
hortfall in lending to agriculture target of 18 per cent. Lead Bank Scheme The R
eserve Bank introduced the Lead Bank Scheme in 1969. Here designated banks were
made key instruments for local development and were entrusted with the responsib
ility of identifying growth centres, assessing deposit potential and credit gaps
and evolving a coordinated approach for credit deployment in each district, in
concert with other banks and other agencies. The Reserve Bank has assigned a Lea
d District Manager for each district who acts as a catalytic force for promoting
financial inclusion and smooth working between government and banks. Special Ag
ricultural Credit Plan With a view to augmenting the flow of credit to agricultu
re, Special Agricultural Credit Plan (SACP) was instituted and has been in opera
tion for quite some time now. Under the SACP, banks are required to fix self-set
targets showing an increase of about 30 per cent over previous years disbursemen
ts on yearly basis (April March). The public sector banks have been formulating
SACP since 1994. The scheme has been extended to Private Sector banks as well fr
om the year 2005-06. 70

Kisan Credit Cards The Kisan Credit Card (KCC) Scheme was introduced in the year
1998-99 to enable the farmers to purchase agricultural inputs and draw cash for
their production needs. On revision of the KCC Scheme by NABARD in 2004, the sc
heme now covers term credit as well as working capital for agriculture and allie
d activities and a reasonable component for consumption needs. Under the scheme,
the limits are fixed on the basis of operational land holding, cropping pattern
and scales of finance. Seasonal sub-limits may be fixed at the discretion of th
e banks. Limits may be fixed taking into account the entire production credit ne
eds along with ancillary activities relating to crop production, allied activiti
es and also non-farm short term credit needs (consumption needs). Limits are val
id for three years subject to annual review. Security, margin and rate of intere
st are as per RBI guidelines issued from time to time. Natural Calamities Relief
Measures In order to provide relief to bank borrowers in times of natural calam
ities, the Reserve Bank has issued standing guidelines to banks. The relief meas
ures include, among other things, rescheduling / conversion of short-term loans
into term loans; fresh loans; relaxed security and margin norms; treatment of co
nverted/rescheduled agriculture loans as current dues; non-compounding of interest
inrespectofloans converted / rescheduled; and moratorium of at least one year. Mic
ro, Small and Medium Enterprises Development With the enactment of the Micro, Sm
all and Medium Enterprises Development (MSMED) Act, 2006, the services sector ha
s also been included in the definition of micro, small and medium enterprises, a
part from extending the scope to medium enterprises. The Act sought to modify th
e definition of micro, small and medium enterprises engaged in manufacturing or
production and providing or rendering of services. Some of the major measures by
RBI/ GOI to improve the credit flow to the MSE sector are as under:
ral Free Loans: Reserve Bank has issued instructions/
guidelines advising ban
ks to sanction collateral free loans up to Rs.5
lakh to the MSE borrowe
rs. Further, banks have also been advised to
lend collateral free loans up t
o Rs.25 lakh, based on good track record
and financial position of the u

Credit Guarantee Scheme for Small Industries by SIDBI: The main objective of the
Credit Guarantee Scheme (CGS) for MSEs is to make available bank credit to firs
t generation entrepreneurs for setting up their MSE units without the hassles of
collateral/third party guarantee. The Scheme envisages that the lender availing
guarantee facility would give composite credit so that the borrowers obtain bot
h term loan and working capital facilities from a single agency. The Trust at pre
sent is providing guarantee to collateral free loans up to Rs. 1 crore under the
Specialised MSE Branch in every District: Public sector banks w
advised in August 2005 to operationalise at least one specialised
MSE branch in every district and centre having a cluster of MSE
ises. At the end of March 2009, 869 specialised MSE bank
branches were o
perationalised by banks.
Formulation of Banking Code for MSE Customers: Th
e Banking
Codes and Standards Board of India (BCSBI) has formulated a
voluntary Code of Banks Commitment to Micro and Small
Enterprises and has set
minimum standards of banking practices for
banks to follow when they are d
ealing with MSEs.
Working Group on Rehabilitation/Nursing of Potentially
Viable Sick SME Units: Detailed guidelines have been issued to banks advisin
g them to evolve Board approved policies for the MSE sector
relating to:
Loan policy governing extension of credit facilities.
Restructuring / Rehabilitation policy for revival of potentially
viable sick units / enterprises.
(iii) Non-discretionary one t
ime settlement scheme for recovery of
non-performing loans.


Institutions to Meet Needs of the Evolving Economy When India embarked upon the
era of planned development, the primary need was to facilitate adequate flow of
credit to the industrial and other sectors according to the Plan priorities. A m
ajor task undertaken by the Reserve Bank was to put in place the necessary insti
tutional mechanism to complement the planning efforts. This was crucial especial
ly in the context of an underdeveloped and evolving financial system. In the abs
ence of a well-developed capital market, the Reserve Bank played a proactive rol
e in setting up a number of specialised financial institutions at the national a
nd regional level to widen the facilities for term finance to industry and for i
nstitutionalisation of savings a novel departure for a central bank. The institu
tions set up included:
1962: Deposit Insurance Corporation 1963: Agricultural Refinance Corporation
1964: Unit Trust of India
1964: Industrial Development Bank of India
1969: National Institute of Bank Management
1971: Credit Guarantee Corporat
1978: Deposit Insurance and Credit Guarantee Corporation (The DIC and
CGC were merged and renamed as DICGC)
1982: National Bank for Agriculture and
Rural Development
1982: Export-Import Bank of India
1987: Indira Ga
ndhi Institute of Development Research
1988: Discount and Finance House of Ind
1988: National Housing Bank
1990: Small Industries Development Bank
of India
1994: Securities Trading Corporation of India
1995: Bharatiya
Reserve Bank Note Mudran Private Limited
1996: Institute for Development
& Research in Banking Technology
2001: Clearing Corporation of India Lim
2008: National Payments Corporation of India
Export Credit Recognising the important role of exports in maintaining the viabi
lity of external sector and in generating employment, the Reserve Bank had sough
t to ensure adequate availability of concessional bank credit to exporters. It t
ook the lead role in setting up the Export Import Bank of India (EXIM Bank) in J
anuary 1982. In recent years, with the liberalisation of real and financial sect
ors of the economy, interest rates on export credit have been rationalised 73
Box 11

within the overall monetary and credit policy framework. In order to provide ade
quate credit to exporters on a priority basis, the Reserve Bank has also prescri
bed a minimum proportion of banks adjusted net bank credit to be lent to exporter
s by foreign banks. Financial Inclusion Post liberalisation and deregulation of
the financial sector within the country, it was observed that banking industry h
as shown tremendous growth in volume and range of services provided while making
significant improvements in financial viability, profitability and competitiven
ess. However, banks had not been reaching and bringing vast segments of the popu
lation, especially the underprivileged sections of society, into the fold of bas
ic banking services to the desired extent. This prompted the need for the RBI to
develop a specific focus towards Financial Inclusion for inclusive growth.
Improving Banking Services in Comparatively Backward States The Reserve Bank est
ablished Working Groups in Bihar, Uttaranchal, Chhattisgarh, Lakshadweep, Himach
al Pradesh and Jharkhand between July 2006 and October 2007 with a view to impro
ving the outreach of banks and their services, promoting financial inclusion and
supporting the development plans of the State Governments. The reports examined
the adequacy of banking services, made constructive suggestions towards enhanci
ng the outreach of banks and promoting financial inclusion as well as revitalisi
ng RRBs and UCBs in the respective regions. To improve banking penetration in th
e North-East, the Reserve Bank of India established a Committee on Financial Sec
tor Plan (CFSP) for North Eastern Region in January 2006. The report includes, a
mong other things, suggestions for expanding the banking outreach, simplificatio
n of system and procedures for opening bank accounts, land collateral substitute
s, currency management, funds transfer and payment facilities and revised human
resources incentives in the region. The Report addressed important issues pertai
ning to financial inclusion, improving CD ratio, providing hassle-free credit. T
he Reserve Bank has also formulated a scheme for setting-up banking facilities (
currency chests, extension of foreign exchange and Government business facilitie
s) at centres in the North-Eastern region, which are not found to be commerciall
y viable by banks. The State Governments would make available necessary premises
and other infrastructural support. The Reserve Bank, as its contribution, would
bear the one time capital cost and recurring costs for a limited period of five
Box 12 74

A special taskforce was established for Sikkim, which looked at various key indi
cators, such as, financial inclusion, branch expansion, business correspondent /
facilitator model, forex facilities, insurance and capital, currency management
, funds transfer and payment, etc. The implementation of the reports recommendati
ons is monitored through an Action Point Matrix and quarterly progress reports.
Customer Service The Reserve Banks approach to customer service focuses on protec
tion of customers rights, enhancing the quality of customer service, and strength
ening the grievance redressal mechanism in banks and also in the Reserve Bank. T
he Reserve Banks initiatives in the field of customer service include the setting
up of a Customer Redressal Cell, creation of a Customer Service Department and
the setting up of the Banking Codes and Standards Board of India (BCSBI), an aut
onomous body for promoting adherence to self-imposed codes by banks. In order to
strengthen the institutional mechanism for dispute resolution, the Reserve Bank
in 1995 introduced the Banking Ombudsman (BO) scheme. The BO is a quasi-judicia
l authority for resolving disputes between a bank and its customers. At present,
there are 15 Banking Ombudsman offices in the country. The scheme covers grieva
nces of the customers against commercial banks, urban cooperative banks and regi
onal rural banks. In 2006, the RBI introduced a revised BO scheme. Under the rev
ised scheme, the BO and the attached staff are drawn from the serving employees
of the Reserve Bank.The new scheme is fully funded by the RBI and covers grievan
ces related to credit cards and activities of the selling agents of banks also.
Under the BO scheme, both the complainant and the bank, if unsatisfied with the
decision of the BO, can appeal against the decisions of the BO to the appellate
authority within the Reserve Bank.

13 Policy Research and Data Dissemination

The Reserve Bank has over time established a sound and rich tradition of policyoriented research and an effective mechanism for disseminating data and informat
ion. Like other major central banks, the Reserve Bank has also developed its own
research capabilities in the field of economics, finance and statistics, which
contribute to a better understanding of the functioning of the economy and the o
ngoing changes in the policy transmission mechanism. Internal Research The resea
rch undertaken at the Reserve Bank revolves around issues and problems arising i
n the current environment at national and international levels, which have criti
cal implications for the Indian economy. The primary data compiled by the Reserv
e Bank becomes an important source of information for further research by the ou
tside world. The Reserve Bank also disseminates data and information regularly i
n the form of several publications and through its website. The Reserve Bank has
made focused efforts to provide quality data to the public at large, which has
emanated from its internal economic research and 76

robust statistical system, established and strengthened over the years. It endea
vours to provide credible statistics and information to users across the spectru
m of market participants, businesses, the media, professionals and the academics
. This is done through various tools, such as, website, press releases, and week
ly, monthly, quarterly and annual publications. India is among the first few sig
natories of the Special Data Dissemination Standards (SDDS) as defined by the In
ternational Monetary Fund for the purpose of releasing data and the Reserve Bank
contributes to SDDS in a significant manner. Data and Research Dissemination Th
e Reserve Bank releases several periodical publications that contain a comprehen
sive account of its operations as well as information of the trends and developm
ents pertaining to various areas of the Indian economy. Besides, there are perio
dical statements on monetary policy, official press releases, and speeches and i
nterviews given by the top management which articulate the Reserve Banks assessme
nt of the economy and its policies. The Reserve Bank is under legal obligation u
nder The RBI Act to publish two reports every year: the Annual Report and the Re
port on Trend and Progress of Banking in India. Besides these and the regular pe
riodical publications, it also publishes reports of various committees appointed
to look into specific subjects, and discussion papers prepared by its internal
experts. The Reserve Bank has also set up an enterprise-wide data warehouse thro
ugh which data is made available in downloadable and reusable formats. Users now
have access to a much larger database on the Indian economy through the Reserve
Banks website. This site has a user-friendly interface and enables easy retrieva
l of data through pre-formatted reports. It also has the facility for simple and
advanced queries. Under the aegis of the Development Research Group in the Depa
rtment of Economic Analysis and Policy, the Reserve Bank encourages and promotes
policy-oriented research backed by strong analytical and empirical basis on sub
jects of current interest. The DRG studies are the outcome of collaborative effo
rts between experts from outside the Reserve Bank and the pool of research talen
t within. The annual Report on Currency and Finance has now been made into a the
me-based publication, providing in-depth information and analysis on a topical s
ubject. It has become a valuable reference point for research and policy formula

The Handbook of Statistics on the Indian Economy constitutes a major initiative

at improving data dissemination by providing statistical information on a wide r
ange of economic indicators. The Handbook was first published in 1996 and over t
he years, its coverage has improved significantly. The Reserve Banks two research
departments Department of Economic Analysis and Policy and Department of Statis
tics and Information Management provide analytical research on various aspects o
f the Indian economy.

14 How Departments Work


and Supervision

Department of External Investments and Operations
Financial Marke
ts Department Financial Stability Unit Internal Debt Management Department Monet
ary Policy Department Department of Banking Operations and Development Departmen
t of Banking Supervision Department of Non-Banking Supervision Foreign Exchange
Department Rural Planning and Credit Department Urban Banks Department Departmen
t of Economic Analysis and Policy Department of Statistics and Information Manag
ement Customer Service Department Department of Currency Management Department o
f Government Bank and Accounts Department of Payment and Settlement Systems Depa
rtment of Administration and Personnel Management Department of Communication De
partment of Expenditure and Budgetary Control Department of Information Technolo
gy Human Resources Development Department Inspection Department Legal Department
Premises Department Rajbhasha Department Secretarys Department

Department of External Investments and Operations
The objectives of the Department of External Investments and Operations are rese
rves and exchange rate management. It also undertakes certain foreign exchange t
ransactions on behalf of the Government and plays a role in international co-ope
ration arrangements involving foreign exchange reserves. (i)
Management of R
eserves Deployment of Asssets: The RBI Act, 1934 provides the overarching legal
framework for deployment of the foreign currency assets and gold and defines the
broad parameters for currencies, instruments, issuers and counterparties. It pe
rmits deposits with central banks and the Bank for International Settlements, de
posits with foreign commercial banks, investments in sovereign and sovereign-gua
ranteed paper with a residual maturity not exceeding 10 years, any other instrum
ents and institutions as approved by the Central Board of the Reserve Bank and d
ealing in certain types of derivatives. While safety and liquidity constitute th
e twin objectives, return optimisation has become an embedded strategy.
Risk Management: The emphasis is on managing and controlling exposure to financ
ial and operational risks. Decision-making relies on regular reviews of investme
nt strategy, and considerable attention to strengthening operational risk contro
l arrangements. (ii)
Government Business The Department manages foreign excha
nge transactions on behalf of the Government of India that include grants-in-aid
and/or loans from various international institutions, including the IMF. (iii)
International Financial Co-operation The Department plays an important role in i
nternational monetary and financial co-operation initiatives, bilateral arrangem
ents and membership of the Asian Clearing Union, etc. (iv) Market Research The D
epartment monitors and analyses key developments in global financial markets as
information inputs for management on a daily basis. Special studies and reports
are also prepared expeditiously on emerging international financial issues. It p
ublishes data on foreign exchange reserves, foreign exchange market operations a
nd deployment of foreign currency assets and gold. 80

Financial Stability Unit

The Reserve Bank established the Financial Stability Unit in July 2009 against t
he backdrop of international initiatives for resolving the global financial cris
is and strengthening the international financial architecture. The Department wh
ich draws upon the expertise from supervisory, regulatory, statistics, economics
and financial markets departmentsconducts macro-prudential surveillance of the f
inancial system, prepares periodic financial stability reports, develops a datab
ase by collecting key data on variables that impact financial stability, conduct
s systemic stress tests, and develops models for assessing financial stability.
The Departments work includes the following: Macro Prudential Surveillance Macro
prudential surveillance of the financial system is the core function, and espec
ially of those institutions and markets it regulates. This involves identifying
key risks and possible inter-connectedness for systemically important institutio
ns, markets and countries. As key risk indicators could change with the changing
economic scenario, identifying them and the associated data requirements is an
ongoing task. Macro Stress Testing The Department conducts system-level stress t
ests based on plausible scenarios to assess the resilience of the financial syst
em. While presently that involves basic single factor sensitivity analysis, more
advanced methods of stress testing are gradually being attempted using scenario
building for multifactor stress testing by developing econometric models. Prepa
ration of Periodic Financial Stability Reports Periodic financial stability repo
rts focus on early stage identification and assessment of the magnitude and impl
ications of potential risks and vulnerabilities that could magnify into a crisis
for the financial system. The reports look at the strength and resilience of th
ree major segments markets, institutions and infrastructure. Secretariat to the F
inancial Stability Board The FSU is the Secretariat to the Reserve Banks represen
tative on the FSB, coordinating with the FSB Secretariat at the BIS in Basel, Sw

Financial Markets Department
Financial Markets Department was set up in 2005 to give the Reserve Bank an inte
grated interface with various financial markets for conduct of its monetary oper
ations. The mandated functions of the Department are:
Monitoring of money, government securities and forex markets.
Monetary operat
ions such as open market operations (OMO), including
liquidity adjustment fa
cility (LAF) and operations under market
stabilisation scheme (MSS).
Conducting operations in the domestic foreign exchange market. Given this manda
te, the Department undertakes the following functions: (i)
Monitoring: Con
ducts detailed analysis of various financial market segments: forex, government
securities, money, equity, corporate debt, commodity and derivatives markets, as
sessing banking system liquidity, and provides analytical inputs to senior manag
ement for decision-making and policy formulation. (ii) Market Operations: Unde
rtakes operations in various segments of domestic market that include:
Intervention operations to curb excessive volatility and to ensure
conditions in the domestic forex market.
Money: Conduct of daily LAF auc
tions for banks and primary dealers;
multiple and longer-term LAF operations
under special circumstances.
Government Securities: Sell/purchase of Governm
ent Securities in the
secondary market for effective liquidity management, sm
volatility in the secondary market, augmenting the Reserve Banks
rupee securities stocks, and conduct of MSS operations for sterilisatio
n of
Rupee liquidity of enduring nature created out of forex market
intervention operations in response to large capital inflows. (iii) Surveillanc
e: Scrutiny and analysis of transactions in government securities and money mark
ets, compiling data on CDs and CPs and monitoring FII investment in government a
nd corporate bonds. (iv)
Policy and Co-ordination: In policy matters, th
e Financial Markets Committee (FMC) chaired by the Deputy Governor- in- charge a
nd comprising heads of relevant departments (DEIO, MPD, IDMD and FMD) guides the
Departments initiatives. The FMC meets every morning to assess and evaluate deve
lopments in various market segments, domestic and foreign. 82

Internal Debt Management Department

The main activities of the Internal Debt Management Department include:
g the Governments debt in a risk efficient and cost effective manner.
ng innovative and practical solutions for broader government
financial issue
Regulation and development of financial markets in keeping with the
best international standards and practices.
Building a robust institutional
framework of primary dealers. The Department operates through the following Div
isions: (i)
Government Borrowing Division: Manages the market borrowing pro
grammes of the Government of India (including preparing an issuance calendar in
consultation with the Government of India), all State Governments and the Union
Territory of Puducherry, choice of instruments and tenor, manages the auction pr
ocess and monitors State and Central cash balances. (ii)
Dealing Operati
ons Division: Interfaces with the Government securities market for purchasing se
curities from the secondary market for investment purposes by State Governments
under schemes like Consolidated Sinking Fund (CSF) and Guarantee Redemption Fund
(GRF) and monitors movement of yields of Government securities, among other thi
ngs. (iii)
Primary Dealers Regulation Division: Regulates and supervises P
rimary Dealers, monitors their bidding commitments in primary auctions, reviews
their performance and authorises new entrants. (iv)
Research Division: The
nodal division for various committees, such as, the High Level Coordination Comm
ittee on Financial Markets and the State Finance Secretaries Conference, analyse
s market developments and practices, acts as the focal point for research contri
butions to IMF, World Bank and G20 publications. (v)
Management Information
Systems Division: Maintains database pertaining to market infrastructure, provid
es data for various statutory and internal publications, runs the technology pla
tform for Government securities auctions, LAF and OMO activities, as well as und
ertakes analysis on long term patterns of Government borrowing. (vi)
Coordination Division: Regulation and development of financial market products (
excluding Forex regulation). 83

Monetary Policy Department
The Monetary Policy Department formulates and implements the Reserve Banks moneta
ry policy. The objectives of monetary policy in India have evolved to include ma
intaining price stability, ensuring adequate flow of credit to productive sector
s of the economy to support economic growth, and maintaining financial stability
. The relative emphasis placed on a particular objective at a particular point i
n time is modulated according to the prevailing macroeconomic conditions and out
look and is spelt out, from time to time, in the policy statements of the Reserv
e Bank. The Department is an inter-disciplinary unit of the Reserve Bank with pr
ofessional staff drawn from both operational and research Departments. Core Acti
vities The core activities of the Department include:
Preparing the Governors
monetary policy statements and its quarterly
Formulating mon
etary policy measures. These include policies on CRR,
SLR, repo and reverse r
epo rates under the LAF, export credit refinance,
market stabilisation sc
heme (MSS) and open market operations (OMOs).
Formulating policy on interest
rates of the banking sector.
Monitoring domestic macroeconomic developments,
key financial market
indicators and global developments including, monetary
policy stance in
select economies.
Making projections on growth, i
nflation and monetary aggregates.
Projecting market borrowing programme o
f the government consistent
with monetary projections.
Managing the po
licy formulation and communication; organising Governors quarterly meetings wit
h bankers, meetings of the Technical
Advisory Committee on Monetary Policy,
pre-policy consultation
meetings with bankers, financial markets, indus
try, NBFCs, RRBs, micro finance institutions, economists, journalists and media
Monitoring maintenance of CRR and SLR.
Monitoring, analysing and disse
mination of data on interest rates in the
banking sector.
ing and analysing data on sectoral credit deployment and
advances agains
t select sensitive commodities.
Authorising food credit limits.
nating with operational departments and other institutions on
specific policy
issues. 84

Department of Banking Operations and Development

The Department of Banking Operations and Development is responsible for regulati
on of commercial banks, which is aimed at protecting depositors interests, orderl
y development and conduct of banking operations, and fostering the overall healt
h of the banking system. Bank / Branch Licensing The Department issues licenses fo
r opening banks and authorisations for opening branches in the country. The polici
es for licences and authorisations are adapted, depending on the circumstances. Regu
lation of Banks The Department is the focal point for providing the framework fo
r regulation of domestic commercial banks. This includes: Formulation of Banking
Prescribing prudential regulations on capital adequacy, income
recognition, asset classification, provisioning for loan and other losses, inves
tment valuation, accounting and disclosure standards, and risk management system
Strengthening the banking system by studying International Best Practic
es and Codes on Anti-Money Laundering (AML) and Combating Financing of Terrorism
(CFT), and issuing necessary instructions, and continuously upgrading Know Your
Customer guidelines. Regulation of Private Sector Banks: Setting up of operations
and winding up of domestic private sector commercial banks. Regulation of Forei
gn Banks and Overseas Offices of Indian Banks: Governing foreign banks entry and
expansion, approval of Indian banks to operate overseas. Regulation of Select Al
l India Financial Institutions: Regulatory oversight of the National Housing Ban
k, and SIDBI, and monitoring sources and deployment. Other functions of the Depa
rtment include: Approving appointment of chief executive officers (private secto
r banks
and foreign banks) and their compensation packages.
g the government on amendments to various banking statutes.
Collecting, dis
seminating and sharing information from banks and
notified All-India Fina
ncial Institutions on defaulters.
Monitoring CRR and SLR maintenance.
Overseeing the amalgamation, reconstruction and liquidation of banking companie
Regulation and Supervision

Regulation and Supervision

Department of Banking Supervision
The Department of Supervision monitors operations of scheduled commercial banks,
including foreign banks in India, all India financial institutions and local ar
ea banks. The Department formulates and implements supervisory policies and stra
tegy to ensure development of a safe, sound and efficient banking system. The br
oad functions of the Department are:
On-site annual financial inspections an
d off-site monitoring and surveillance.
Formulating supervisory policy.
Regulating the audit function.
Monitoring high-value fraud in financial instit
utions and NBFCs.
Secretarial services to the Board for Financial Supervi
sion (BFS). On-site inspection is the main instrument of the Reserve Banks superv
ision. The Reserve Bank also carries out periodic surveys to ensure that banks f
ulfill license conditions. The Department supplements annual financial inspectio
n with off-site surveillance and monitoring, which examines the financial condit
ion of the banks in between on-site inspections to take appropriate supervisory
action in time, on the basis of capital adequacy, asset quality, loan concentrat
ion, operational results, connected lending, profile of ownership, control, mana
gement, liquidity and interest rate risks. The Department also periodically cond
ucts reviews of macro and micro prudential indicators, conducts interest rate se
nsitivity analysis and other relevant studies. Banks have to submit periodic Con
solidated Prudential Reports (CPRs). A banking group also has to prepare Consoli
dated Financial Statements (CFS). The Department also monitors financial conglom
erates (FCs), including through off-site surveillance, reviews FC monitoring act
ivities by the Standing Technical Committee and has discussions with the major e
ntities in the FC. Certain other tools, such as, quarterly discussions with the
CEO and senior management, reports of the Reserve Banks nominee directors on the
boards of State owned banks and additional directors in private banks, and a sys
tem of prompt corrective action, are also used for effective supervision. The De
partment formulates policy on bank audits and the appointment of statutory audit
ors. The Department serves as the nodal department for monitoring large value fr
auds in banks. 86

Department of Non-Banking Supervision

The Department of Non-Banking Supervision regulates and supervises Non-Banking F
inancial Companies (NBFCs). The Department has 16 regional offices across the co
untry. The major financial intermediaries regulated by the Department are (i) De
posit accepting NBFCs, (ii) Non-Deposit accepting NBFCs and (iii) Securitisation
Companies (SCs) / Reconstruction Companies (RCs). Broadly, the functions of the
Department are: (i) Regulatory Activities
Formulating regulatory framewor
k and issuing directions to NBFCs.
Issuing / cancellation of certificates
of registration for NBFCs.
Ensuring proper classification for NBFCs by cla
ssifying them into four
categories namely, Asset Finance Companies, Loa
n Companies,
Investment Companies and Infrastructure Finance Companies.
Conducting on-site inspection, scrutiny and follow up.
Off-site surveillance a
nd scrutiny of various returns.
Attending to complaints relating to NBFCs and s
upplying data to various
departments of the Reserve Bank and other organ
Initiating deterrent action against errant companies.
intelligence gathering.
Monitoring of receipt of auditors exception reports/annu
al certificates (ii) Activities with regard to Securitisation and Reconstruction
Issuing certificate of registration for SC / RC under SARFAESI
Act, 2002.
Attending to various operational issues raised by SCs / RCs.
Collection of returns and preparing reviews on SCs / RCs functioning.
Study o
f operations and inspection of SCs / RCs. (iii) Developmental Activities Co-ordi
nation with State Governments and other regulators for enacting
state l
egislations to curb unauthorised and fraudulent activities in the
Publicity campaign for depositors education and awareness, workshops /
seminars of trade and industry organisations, depositors associations.
Regulation and Supervision

Regulation and Supervision

Foreign Exchange Department
The Foreign Exchange Department covers the following areas: (i) Current Account
Trade: Monitoring export and import transactions delegated to a
dealers. The Department grants approval where powers have not b
Remittances: Granting approvals in case of other non-tr
ade current
account remittances beyond the delegated powers of authorised d
This includes remittances for travel, gifts, donations, medical
education, immigration charges, consultancy services, etc. (ii)
Capital Account Transactions
Foreign Direct Investment: Foreign investments
in India should be in tune
with the Foreign Direct Investment (FDI) policy
. The Department monitors
post-issue reporting and transfer of shares bet
ween residents and non residents, collects data on portfolio investments throu
gh authorised
dealer banks and approves the opening of liaison and branch off
ices in
India by foreign companies.
Overseas Direct Investment: Ind
ian companies and Registered Partnership
firms are allowed to invest up
to 400 per cent of their net worth under
the automatic route in joint ve
nture/wholly owned subsidiary abroad. The
Department grants the required
approval for investments beyond this limit.
External Commercial Borrowing:
External commercial borrowing (ECB)
refers to commercial loans in the form
of bank loans, buyers credit, suppliers credit, securitised instruments availe
d from non-resident
lenders by Indian companies with minimum average maturi
ty of three
years. ECBs can be availed of through automatic and approval ro
Foreign Currency Accounts: The Departments approval is required in
cases where general permission is not available, such as deposit accounts
by Non-Resident Indians and Persons of Indian Origin and foreign
y accounts. (iii) Compounding
The Reserve Bank is empowered to compound any c
ontravention of the
FEMA, except the contraventions under section 3 (a), on
an application
made by the contravener. (iv) Development Activity
Formulating risk management policies for foreign exchange exposures
ng derivative contracts, and administering rules governing personal
nces and money transfers.
Collecting and compiling data on foreign exchan
ge transactions on
fortnightly basis for quick estimates of the Balance of
Payments. 88

Rural Planning and Credit Department

The Rural Planning and Credit Department studies and coordinates issues related
to rural credit and development. The RBI Act, 1934 says: The Bank may maintain ex
pert staff to study various aspects of rural credit and development and in parti
cular, it may, (a)
tender expert guidance and assistance to the National B
ank (NABARD) (b)
conduct special studies in such areas as it may conside
r necessary to do
so for promoting integrated rural development. The Rural
Planning and Credit Department, both on account of the historical compulsions o
f the Indian economy and the special responsibility cast on it in terms of the s
tatute, presently undertakes the following functions through its Central Office
and 22 Regional Offices:
Formulates policy on rural credit and priority
sector lending, including,
agriculture and micro and small enterprises.
Assesses quantitative and qualitative performance of commercial banks in prio
rity sector lending, including agriculture, micro and small
enterprises sec
tor, and of various Government sponsored poverty
alleviation programmes.
Regulates Regional Rural Banks and State/ District Central cooperative
banks as provided under various Acts.
Formulates policy with regard to Lead B
ank Scheme and monitors the
implementation thereof.
Undertakes spec
ial studies relating to various aspects of rural credit;
Formulates poli
cy with regard to the development of micro-finance sector
in the country.
Formulates policy for enhancing financial inclusion, particularly in th
under-banked and un-banked regions/ pockets of the country and
monitors the performance of banks in this area.
Deals with the National
Bank for Agriculture and Rural Development
(NABARD), based on various stat
utory provisions.
Regulation and Supervision

Regulation and Supervision

Urban Banks Department
The Urban Banks Department regulates and supervises the banking activities of Pr
imary (Urban) Cooperative Banks (UCBs). The Department carries out its functions
through its Regional Offices, and its functions can be divided into four parts:
(i) licensing, (ii) banking policies, (iii) supervision, and (iv) development.
Licensing: The licensing division formulates eligibility criteria for the issue
of banking licenses and authorising branch expansions for already licensed banks
. It also grants approvals for expanding areas of operation for UCBs. Banking Po
licies: The Banking Policy Division formulates policies for regulation and super
vision of UCBs under the guidance of the Board for Financial Supervision (BFS) a
nd the Standing Advisory Committee (SAC) for Urban Cooperative Banks, under the
chairmanship of the Deputy Governor-inCharge. Besides the formulation of banking
policies, the Division also disburses claims to UCBs under various financial as
sistance schemes of the Central or State Government, attends to compliance work
relating to the directions of various authorities, replies to the Parliament que
stions, and coordinates with other bodies. Bank Supervision: The Department has
two Bank Monitoring Divisions (BMD), one for scheduled and the other for non-sch
eduled UCBs for on-site inspection. The BMDs are responsible for overall monitor
ing of the functioning of UCBs. While the Regional Offices carry out on-site ins
pections of UCBs, the supervisory and follow-up actions are shared with the Cent
ral Office. The Off Site Surveillance segment of the Bank Supervision Division m
onitors the functioning of UCBs continuously through a set of periodical returns
. It also provides data and support services for preparation of policies, report
s and publications. The merger cell within the Department oversees the sanction
and process of amalgamation of UCBs as a non-disruptive exit route for weak UCBs
, under the guidance of an expert committee. Developmental Functions: The Depart
ment also undertakes training to the officials of UCBs to upgrade their knowledg
e, skill and expertise.

Department of Economic Analysis and Policy

The Department of Economic Analysis and Policy undertakes policy supportive rese
arch on macroeconomic issues of national and international importance. The Depar
tment is entrusted with multiple functions, prominent among which are the follow
Studying and analysing domestic and international issues affecting the
Indian economy.
Generating primary data on monetary and credit aggregat
es, balance
of payments and external debt statistics, flow-of-funds, financ
ial saving
and state finances.
Providing advice and views on economic
policy formulation, shaping of monetary, banking and financial policies.
Preparing statutory publicationsthe Annual Report and the Report on
Trend a
nd Progress of Banking in India.
Preparing other publications, such as,
Handbook of Statistics on Indian
Economy, Report on Currency and Finance
, State Finances: A Study of
Budgets of State Governments, Macroeconomic and
Developments, RBI Bulletin and Statistical Supplement. Other Fu
nctions The Department also undertakes the following functions:
Coordinating wi
th international institutions, such as, the IMF for the
Article IV coun
try consultations and supports work relating to G-20,
periodic BIS meetings a
nd SAARC Finance.
Providing policy support to the Government and backgrou
nd material
for the Economic Survey, Finance Ministers Budget Speech and
Parliament questions.
Undertaking estimation and forecasting of monetary and
aggregates required for decision-making.
Promoting resea
rch and exchange of views with outside experts on topical
issues through
seminars, collaborative studies and endowment schemes.
Administering Research
Chairs and Fellowships set up by the Reserve
Bank in 17 Universities and res
earch institutions, special financial grants
for supporting specific researc
h projects and publications.
Organising three annual lectures in the memory
of C.D. Deshmukh, L.K. Jha and P.R. Brahmananda. They are delivered by disting
uished personalities in the areas of macroeconomics, banking and finance.
Identifying and collecting data of historical value for writing the history
of the Reserve Bank. 91

Department of Statistics and Information Management
The Departments mandate is to manage comprehensive statistical systems relating t
o monetary, banking, corporate and the external sector; conduct structured surve
ys and carry out specialised statistical analysis and forecasting. The Departmen
t undertakes the following core activities: (i) Collecting, processing, analysin
g, storing and disseminating data on banking, corporate and external sector. Thi
s includes:
Compiling banking statistics relating to cash reserve ratio, mo
ney supply,
deposits, credit, investments, international banking, annual ac
counts and
other banking indicators of commercial banks.
Providing prima
ry inputs for compiling balance of payment (BoP),
external debt and inter
national investment position (IIP) under the IMFs
Special Data Disseminat
ion Standard.
Providing data on Indias private corporate business sector, asse
the investment climate, analysing corporate finances that form the basi
for assessing linkages between corporate performance and monetary polic
y. (ii) Designing and implementing regular sample surveys: (a) to generate forwa
rd looking indicators for monetary policy (e.g., industrial outlook, inflation e
xpectations of households, order books, inventory and capacity utilisation, cred
it conditions, professional forecasters projections on major economic indicators
), and ad hoc surveys on financial inclusion, customer services, etc. (b) to fil
l in data gaps in compilation of BoP and IIP and conducting surveys. (iii) Devel
oping methodologies for measurement, estimation and forecast of important macroeconomic indicators, and improving the statistical system in various sectors of
the economy. (iv) Preparing estimates of saving and capital formation for privat
e corporate business sector in India for National Accounts Statistics (NAS). (v)
Providing technical support to other departments for statistical analysis, info
rmation technology, large-scale data management, and related systems development
s. (vi) Coordinating statistical activities with national and international orga
nisations, including the provision of electronic data dissemination platforms, t
hrough the Banks Data Warehouse ( and Database on Indian
Economy ( 92

Customer Service Department

In July 2006, the Customer Service Department was created to consolidate custome
r service activities undertaken by various departments of the Reserve Bank. Broa
dly, the activities of the Department are:
Ensuring redressal of consumer
grievances in banking services in an
expeditious, fair and reasonable manner
that will provide impetus to
improved customer services in the banking secto
r on a continuous basis.
Providing feedback and suggestions towards fram
ing appropriate and
timely guidelines for banks to improve the level of cus
tomer service and
to strengthen their internal grievance redressal system
Enhancing the awareness of the Banking Ombudsman Scheme (BO). Banking O
mbudsman Section monitors complaint redressal through the IT enabled Complaint T
racking System. It strives to make the Banking Ombudsman Scheme 2006 more custom
er friendly in areas, such as, mode of complaint receipt, disposal procedures, a
ppeal provision and ownership. It prepares guidance manuals for updating knowled
ge and for ensuring consistency across BO offices. The section also handles appe
als received against the decision of the BO. Public Grievance Redressal Section
handles complaints against banks as swiftly as possible from the public as well
as from Members of Parliament. Complaint Redressal Section (CRC) monitors the wo
rk of Complaint Redressal Cells in the Regional Offices. For this purpose, the S
ection collects monitoring returns like Citizens Charter- Quarterly Returns, rep
orts on unofficial visits to banks conducted by ROs and monthly status of compla
ints received, disposed and pending. The CRC also monitors release of half-yearl
y advertisements by ROs on the first Sunday of January and July every year. Righ
t to Information Section processes all references received under the Right to In
formation Act and sends replies to the applicants. Policy and Research Section e
volves policies, in consultation with BCSBI and IBA, for ensuring transparency,
fairness and reasonableness in bank services and their charges. It also prepares
the Annual Report of the Banking Ombudsman Scheme to enhance awareness about it

Department of Currency Management
The Department of Currency Management provides focused attention on the manageme
nt of currency notes and coins. The mandated functions of the Department include
those related to:
Management of currency notes, such as, design, printing
and timely
supply of currency notes and withdrawal of currency notes and
distribution of coins.
Keeping circulation of counterfeit banknotes in check.
Monitoring currency chests and availability of customer service to the
public by facilitating exchange of notes and coins. Under this mandate the Depa
rtment undertakes the following functions:
Planning, Research and Developm
ent: Evaluating the need for the
introduction of new design banknotes an
d the security features that need
to be incorporated in banknotes, assess
ing currency needs, (notes and coins) and ensuring adequate and timely supplie
s of notes and coins.
Resource and Remittance Operations: Monitoring allotmen
t of notes
and coins among issue offices and logistics for their supply an
d overall
resource operations.
Currency Chest Operations: Formulating
policy on the establishment of currency chests, and monitoring their operation
Note Exchange Operations: Attending to the policy regarding the
exchange of soiled and mutilated notes and administration of the Reserve
Bank of India (Note Refund) Rules through Reserve Bank of India Issue Offices
and banks, and monitors customer service to the public in this
Forged Notes Vigilance Operations: Formulating policy on dealing with
forged notes, compiling data and sharing information on cases of forged
notes with central and state Government, and organising public
ss on the features of genuine currency notes.
Note Processing Operations: Mon
itoring soiled notes accumulated at
currency chests and their withdrawal an
d disposal through a mechanised
and eco-friendly manner.
y Related Operations: Making policy with regard to security
arrangements at
issue offices and currency chests, treasure in transit as
well as periodi
cal reviews of security arrangements.

Department of Government and Bank Accounts

The Department of Government and Bank Accounts oversees the functions of the Res
erve Bank as a Banker to government, including administering the public debt of
the government, acts as banker to banks; and maintains the internal accounts of
the Reserve Bank. It is also overseeing implementation of the Core Banking Solut
ion in the Bank. At the operational level the various functions are as follows:
The Public Accounts Departments (PAD) receives money and makes payments at var
ious Regional Offices on behalf of the government; a
Central Accounts Sectio
n (CAS) at Nagpur maintains the principal
government account, and the Pub
lic Debt Offices (PDO) at the Regional Offices provide depository services for
government securities.
The banker to banks function and maintaining the intern
al accounts of the Reserve Bank is delivered through the Deposit Accounts Depa
rtment (DAD) at the Regional Offices. The Department of Government and Bank Ac
counts formulates policy and issues operational instructions to the above depart
Banker to Government: The Central Accounts Section at Nagpur
ns interest free accounts, consolidates and maintains the final
s of the government. When there is a shortfall in cash balances,
the CAS
provides temporary liquidity in the form of Ways and Means
Advances (WMA).
A RBI Remittance Facility Scheme provides a
mechanism of funds transfer to
banks and government departments.
Government Debt Administration: The adm
inistration of public debt
involves the accounting of government loans (ma
rket loans, small saving
schemes, etc), management of floatation and red
emption of debt, and
recovery of floatation and management charges from the
Banker to Banks: The Reserve Bank provides banks, financial ins
and international bodies the facility of non-interest bearing a
they can use for inter-bank settlement, maintenance of statutor
y reserves
and managing their funds position.
Maintenance of Internal
Accounts: The Department consolidates and
maintains the internal accounts
of the Reserve Bank. This includes,
compiling weekly statements, preparing
annual profit and loss statement
and balance sheet of the Reserve Bank,
as well as matters relating to statutory auditors.

Department of Payment and Settlement Systems
The Payment and Settlement Systems Act, 2007 empowers the Reserve Bank to regula
te and supervise the payment and settlement systems in the country. The Reserve
Bank has played an active developmental role both in setting up of new payment s
ystems and in improving the safety and efficiency of existing ones (see Box 10).
The functions of the Department include:
Policy Formulation: Framing policies a
nd prescribing standards
governing the operations, supervision and overs
ight of payment and
settlement systems in the country, both for large value
payment systems
and retail payment systems for banking as well as non-b
anking entities. Authorisation: Issuing the required authorisation to all person
who wish to set up and operate large value and retail payment s
The process is clearly laid down and the concerned regulatory
departments are consulted when considering applications for
The Real Time Gross Settlement (RTGS) System is an
example of large value
payment system. Retail payment systems include,
cheque based system, el
ectronic funds transfer National Electronic Fund
Transfer (NEFT) / Elect
ronic Clearing Service (ECS), credit/debit
cards, prepaid cards, ATM netwo
rks, etc.
Monitoring and Supervision: Monitoring and supervising entities
authorised to operate payment systems through periodical reporting
and onsite inspections. The Department also issues directives, both
general and spe
cific, to regulated entities and is empowered to lay down
technical and o
perational standards for various payment systems and
initiate penal action a
gainst entities violating the provisions of the
Payment and Settlement
Systems Act, 2007. India is a member of the Committee on Payment and Settlement
Systems (CPSS) of the Bank for International Settlements. The Department is acti
vely associated with the working groups constituted by the CPSS for laying down
standards with respect to various components of the payment and settlement syste
ms. The Reserve Bank is also a member of the SAARC Payments Council (SPC).

Department of Administration and Personnel Management

The core functions of the Department of Administration and Personnel Management

Implementing the Reserve Banks policies about recruitment, placement, promotion,

transfer and allotment of flats. Overseeing the conduct of employees and adminis
tering disciplinary actions as well as attending to cases involving misconduct o
f senior officers. Ensuring implementation of Central Vigilance Commissions instr
uctions and guidelines and to maintain vigilance administration in the Reserve B
ank. Framing policy and monitoring security arrangements in the Reserve Bank and
providing necessary manpower for this purpose. Implementing guidelines regardin
g prevention and redressal of sexual harassment of women at workplaces. The Depa
rtment provides the secretariat to the Central Complaints Committee. Coordinatin
g, monitoring and disseminating information in accordance with the provisions
of the Right to Information Act, 2005. The Department is the nodal point for all
other Central Office Departments with regard to implementation of the provision
s of the Right to Information Act, 2005 as applicable to the Reserve Bank.

Department of Communication
Communication is central to the functioning of central banks. The Reserve Banks c
ommunication strategy has evolved over tlme and focuses on the following key ele
Transparency for strengthening accountability and credibility.
Clarity on the Reserve Banks role and responsibilities with regard to its
multiple objectives.
Managing expectations and promoting a two-way flow of i
Disseminating information, statistics and research. The balance
and mix of communication products is tailored to the target audiences. These in
clude researchers, analysts, academics, media, regulated entities, other central
banks, rating agencies, multilateral institutions, market participants, and Gov
ernment agencies. It also includes the common person women, senior citizens, def
ence personnel, and school children. Communication Tools Engagement with the Med
ia: This includes building relationships with print and broadcast media, issuing
press releases; coordinating press conferences and interviews with RBI official
s; organising conferences with senior editors; arranging training courses on cen
tral banking for the media. RBI Website: The Department manages the RBIs external
website, which is one of the main sources of information about the Reserve Bank
for the public. The website hosts all press releases, circulars, statistics, sp
eeches by senior management as well as publications. Publications: The Departmen
t helps disseminate the Reserve Banks main publications and staff studies through
various channels. It also assists operational departments in editing, printing
and publishing brochures and pamphlets. Outreach to a Broader Group of Stakehold
ers: The Department assists and advises management in reaching out to other cons
tituencies through briefings/presentations, teleconferences, and townhall meetin
gs. Financial Literacy The Department plays a crucial role in the Reserve Banks e
fforts towards financial literacy, including through assisting in developing edu
cational material. A separate website for financial education has been created a
s part of the RBIs web portal, with information in English and Hindi and 11 regio
nal languages.

Department of Expenditure and Budgetary Control

The task of the Department of Expenditure and Budgetary Control is to provide ef
ficient and prompt services to present and past employees of the Reserve Bank in
establishment-related payments, pension payments and funds-related payments, as
well as maintenance of various Funds Accounts. It also manages the Integrated E
stablishment System, which is a package for effecting establishment-related paym
ents to all the staff members. The main functions of the Department include:

Preparing the Reserve Banks budget. Ensuring adherence to budget discipline throu
gh quarterly and monthly reviews. Administration of Expenditure Rules and Banks H
ousing Loan Rules. Processing and disbursements of salary and other establishmen
t related payments. Acting as Central Office for establishment related matters i
n RBI; and Management of various Funds, such as, the Provident Fund, Gratuity an
d Superannuation Fund.

Department of Information Technology
The Department of Information Technology is responsible for IT related services
to the various functions of the Reserve Bank and the banking sector. It also giv
es broad policy guidelines in critical areas, such as, information security. Bro
adly, the Department attends to:
Activities related to broad policy form
ulation for IT Architecture in the
Bank, Information Security and the impl
ementation of these policies.
Implementation of major IT projects and their m
anagement, such as,
the RTGS, the Public Debt Office Negotiated Dealing Sys
tem/Securities Settlement System (PDO-NDS/SSS), Centralised Public Accounts
System (CPADS), Structured Financial Messaging System (
Support services for IT systems for smooth operations of the applicatio
systems through Data Centres and management of Local Area Networks
(LAN) etc.
Monitoring progress of computerisation in banks. The Department
discharges these roles through its various divisions, namely, Policy and Operat
ions Division, Information Technology Support Division, Networking Division and
System Development and Support Division. The three state-of-the-art Data Centres
have been operationalised and managed by the Department. All banking and non-ba
nking applications are run from these data centres in a very secure and efficien
t way.

Human Resources Development Department

The vision of the Human Resources Development Department is essentially to help
the Bank carry out its central banking activities. The mission of the Department
is to create a facilitating environment to enhance the efficiency of the Bank;
to empower the staff so as to draw out the latent potential; and to create condi
tions for a more wholesome quality of life on the work as well as personal front
. Functions of HRDD
Evolve HR policies relating to recruitment, performance
and appraisal system, placement, promotion and career progression, industrial
deputation / secondment, compensation policy, retirement and vo
vacation, training establishments, mobility (transfer / rotatio
remuneration and reward mechanism. The Department also sees to staff
welfare, internal communication, organisational development, training and ski
lls upgradation (policy and implementation, both) and medical
Interface with other institutions, such as, the government and other
banks on HRD issues.
Review the appraisal system on an ongoing basis in orde
r to make it an
effective tool for HRD policy management.
and implement an effective counseling system.
Design career and succession pl
Review and revitalise training functions.
Summer Placement.
Annual Young Scholar Awards Scheme.
Formulate and administer the Staff Sugg
estion Scheme.
Publication of House Journal, Without Reserve.

Inspection Department
Inspection Department examines and evaluates the adequacy and reliability of exi
sting systems and ensures that the work is carried out as per laws, regulations,
internal policies, procedures and Central Office instructions. Major Functions
The Department prepares a Management Audit Report on the health
of the
auditee office highlighting areas, such as, management effectiveness, decision
making process, communication process and other
relevant aspects.

The e-compliance monitoring and follow-up are done through an online Compliance
Monitoring and Reporting System (COMORS). The compliance position of major findi
ngs of MASI Reports is monitored by the Executive Directors Committee (EDC) and I
nspection and Audit SubCommittee (IASC) of the Central Board. The efficacy of th
e whole system is also ensured through Concurrent Audit and Control Self Assessm
ent Audit systems, periodically reviewed through an off-site Audit Monitoring Ar
rangement and on-site snap audits of offices (ROs / CODs / TEs). The Department
also provides support to other departments and coordinates with others for condu
cting technology audits and ISO / ISMS certification.


Legal Department
The main function of the Legal Department is to tender legal advice on matters r
eferred to it by the various departments and offices of the Reserve Bank. These
references involve interpretation of the Constitution of India, provisions of th
e Reserve Bank of India Act, 1934, Banking Regulation Act, 1949, Foreign Exchang
e Management Act, 1999, Government Securities Act, 2006, Payment and Settlement
Systems Act, 2007 and various other statutes. The Department is also required to
interpret the rules and regulations governing the Reserve Banks staff and to dea
l with legal issues relating to industrial relations. Other functions include:
Drafting legislation, rules, regulations and statutory notifications related
to banking and finance.
Briefing the counsel appearing in courts on beh
alf of the Reserve Bank
and drafts pleading.
Attending to investigat
ion of title of land for acquisition of premises for
the Reserve Bank and ha
ndling the documentation relating to
construction of buildings.
ing an in-house Legal Journal (Quarterly) Legal News and Views
dealing with de
velopments in banking and other related laws.

Premises Department
The Premises Departments responsibility is to create and maintain premisesrelated
infrastructure. The Department frames policies and guidelines on physical infra
structure, acquisition, maintenance, consolidation and disposal of office and re
sidential space. It allocates capital budgets to Regional Offices and monitors h
igh- value works/projects of Estate Departments across the country, keeping in m
ind ecological and environmental concerns. The current thrust-areas of the Depar
tment are as follows:
Promoting greater environmental consciousness, conservi
ng resources like
energy and water and auditing the use of these resource
Dead Stock management through integrated Estate Management
e system across offices.
Rationalisation of Banks properties.

Rajbhasha Department
The functions of the Rajbhasha Department include implementation of the official
language policy of the Government of India, conducting developmental activities
and translation. The Departments activities are the following:
Making policy f
or progressive use of Hindi as per Government guidelines
and monitoring
the progress through various means, such as, collecting
data, preparing
reviews, holding quarterly meetings of the official
language Implementation
Committee, submitting different reports to
Government and Committee of Par
liament and issuing instructions and
guidelines for smooth implementation of
the official language.
Ensuring uniformity in translation through preparation
of Banking
Shabdavali and Banking Paribhasha Kosh. The department also publis
books in Hindi on banking subjects, and brings out the only Hindi
magazine on banking Banking Chintan Anuchintan.
Conducting training programmes
and workshops for staff to enhance the use of Hindi in the internal working of
the Reserve Bank. Celebrating Hindi Samaroh is also an important activity of
the Department.
Organising the Rajbhasha Shield competition for public sector b
and financial institutes as well as for the Reserve Banks own offices an
departments. The Department also conducts all India Hindi essay writing
and House Journal competition for banks. The evaluation work on behalf
of the Ministry of Home Affairs for the Indira Gandhi Shield for Rajbhasha
for banks is also done by the Rajbhasha Department.
Ensuring day to day tra
nslation of press releases and various documents,
including that of statu
tory publications, such as, the Annual Report and
Report on Trend and Pro
gress of Banking in India.

Secretarys Department
The Department primarily deals with the governance issues of the Reserve Bank in
volving the constitution and functioning of the Central Board, its Committees an
d the Top Management. Some of the major functions of the Department are discusse
d below: (i)
Central Bank Governance The Department assists Senior Managemen
t in the decision making process by providing secretarial and logistics support.
This includes secretarial work connected with the seven meetings of the Central
Board each year in the four metros and three other state capitals, by rotation,
46 weekly Committee meetings, annual meeting of the Administrators of the Reser
ve Bank of India Employees Provident Fund, weekly meetings of the Top Management
Group (TMG) and the weekly Deputy Governors Committee meetings. (ii) Top Manageme
nt Services Coordination with Government The Department attends to the work rela
ting to the joining, retirement and relinquishing of charge of the Governor and
Deputy Governors; terms and conditions of their service; and constitution of the
Central and Local Boards. The Department also facilitates review and obtains th
e requisite approvals for the revision of the pay and allowances and facilities
extended to the Governor and Deputy Governors from time to time, in consultation
with the Central Board, its Committee and the Government of India. (iii) Intern
ational Relations and Protocol Services The Department facilitates the visits an
d meetings of representatives of other central banks, governments and internatio
nal agencies. It also provides requisite protocol support to the visitors. (iv)
Administrative and Staff Services The Department is the administrative hub for f
ive central office departments IDMD, FMD, MPD, DoC and FSU and supports the main
tenance of staff records. (v)
Local Board Cell A Local Board Cell (LBC), set
up in the Department, allows for two-way communication between the various Centr
al Office Departments and the Local Boards.

Year 1913 1926
Chronology of Important Events in the History of the Reserve Bank
Events The Royal Commission on Indian Finance and Currency (Chamberlain Commissi
on) underlined the need for a central bank for India. Hilton Young Commission re
commended the establishment of a central bank in India, to be named as Reserve B
ank of India. The government introduced The Gold Standard and Reserve Bank of Ind
ia in the legislature. The Bill was referred to a Joint Committee to resolve some
of the controversial clauses. Government of India published the New Gold Standar
d and Reserve Bank Bill, as amended by the Joint Committee. Government clarified
that it did not intend to bring the Reserve Bank Bill before the legislature in
the near future. Report of the Indian Central Banking Enquiry Committee released
, strongly recommending the establishment of the Reserve Bank. Report of the Ind
ia Office Committee released, recommending establishment of Reserve Bank of Indi
a as a private shareholders bank. London Committee, which was set up after the In
dia Office Committee, adopted the 1928 Reserve Bank Bill as the basis and propos
ed certain amendments to the Bill. Reserve Bank of India Bill, drafted on the ba
sis of London Committee recommendations, introduced in the Legislative Assembly.
Reserve Bank of India Bill passed by the Assembly. Reserve Bank of India Bill w
as passed by the Council of States. Reserve Bank of India Bill received the asse
nt of the Governor-General. The Reserve Bank of India was created as a private s
hare holders bank. Sir Osborne Smith was appointed the first Governor of the Rese
rve Bank of India. Sir James Braid Taylor assumed office of the Governor. The Re
serve Bank acted as banker to the Government of Burma and was also responsible f
or note issue in Burma as per the Burma Monetary Arrangements Order. The Reserve
Bank issued its own bank notes. Introduction of Exchange Controls in India unde
r Defence of India Rules. Indian Bank Act to bring banks within the ambit of the
Reserve Bank. The Reserve Banks accounting year changed from January -December t
o July- June. The silver rupee replaced by the quaternary alloy rupee. One Rupee
note reintroduced. This note had the status of a rupee coin and represented the
introduction of official fiat money in India. Sir C. D. Deshmukh took over as G
overnor. The Public Debt Act passed by the Government enabled the consolidation
of laws relating to Government securities and management of public debt by the R
eserve Bank.
January 1927 March 1927 January 1928 February 1929 1931 March 1933 July 1933 Sep
tember 1933 December 1933 February 1934 March 1934 April 1935 July 1937 March 19
37 January 1938 September 1939 1939 March 1940 1940
August 1943 1944

February 1945 1945 January 1946 1946 March 1947 1947 1948 June 1948 January 1949
March 1949 July 1949 September 1949 April 1950 1952 September 1954 May 1955 195
6 October 1956 1956 January 1957 March 1957 1961 1962 March 1962 July 1963 1963
February 1964 June 1964 1966 June 1966
Non-scheduled banks were allowed to open accounts with the Reserve Bank. Establi
shment of Department of Banking Operations and Development and Research and Stat
istics Department in the Reserve Bank. High Denomination Bank Notes of Rs 500, R
s 1,000 and Rs 10,000 were demonetised to curb unaccounted money. Interim arrang
ements for bank supervision were put in place by an ordinance. The Reserve Bank
ceased to function as Central Bank of Burma. Foreign Exchange Regulation Act was
passed. Industrial Finance Corporation of India was established on the recommen
dation of the Central Board of the Reserve Bank. The Reserve Bank ceased to func
tion as Central Bank of Pakistan. The Reserve Bank was nationalised. Banking Com
panies Act, 1949 came into force, replacing the earlier interim arrangements. Th
is formed the statutory basis of bank regulation and supervision in India. Sir B
enegal Rama Rau assumed office as Governor. Devaluation of the Rupee by 30.5 per
cent consequent on the identical devaluation of Pound Sterling. Foreign Exchang
e Regulation Act, 1949 came into force. The Reserve Bank launched a pioneering p
roject of All India Rural Credit Survey. The Reserve Bank set up Bankers Training
College at Mumbai (earlier Bombay). The Imperial Bank was nationalised and rena
med as State Bank of India with the Reserve Bank taking a 60 per cent stake in i
t. Introduction of selective credit controls. Introduction of decimal coinage. S
ystem of note issue was changed from proportional reserve system to minimum rese
rve system. Shri K.G. Ambegoankar was appointed as Governor. Shri HVR Iyengar ap
pointed as Governor. Failure of two commercial banks, namely, Palai Central Bank
Ltd (Kerala) and Lakshmi Bank (Maharashtra). This led to deliberations on the n
eed for deposit insurance in India. Deposit Insurance Corporation came into exis
tence. Shri P.C. Bhattacharya appointed as Governor. Agricultural Refinance Corp
oration was set up as a subsidiary of the Reserve Bank. Reserve Bank Staff Train
ing College (RBSC) was established. Unit Trust of India came into existence with
50 per cent share holding by the Reserve Bank. Industrial Development Bank of I
ndia came into existence with the Reserve Bank wholly contributing the capital o
f Rs. 10 crore. Cooperative banks brought under the ambit of regulation of the R
eserve Bank. Indian rupee was devalued by 36.5 per cent.

March 1966 April 1967 July 1967 April 1968 May 1968 December 1968
Department of Financial Companies was established. The size of the bank notes wa
s reduced. Shri L.K. Jha appointed as Governor. Demonetisation of quaternary coi
ns. The Bill for setting up of the Agricultural Credit Corporation passed in Par
liament. The Deposit Insurance Corporation (Amendment) Bill, 1968 came into forc
e. All central, state and urban cooperative banks with paid-up capital of Rs 1 l
akh or more were covered under the scheme. The government propounded the tenet o
f Social Banking. This led to nationalisation of 14 commercial banks. The Banking
Companies (Acquisition and Transfer of Undertakings) Ordinance 1969 promulgated.
National Institute of Bank Management (NIBM) established at Mumbai which was su
bsequently shifted to Pune. Cooperative Bankers Training College was established
at Pune. Shri B.N. Adarkar appointed as Governor. Shri S. Jagannathan appointed
as Governor. Credit Guarantee Corporation of India was established. Basic Stati
stical Returns (BSR) Scheme introduced to collect banking statistics. The Foreig
n Exchange Regulation Act, 1947 was amended. Foreign Exchange Regulation Act, 19
73 came into force. The Cooperative Bankers Training College was renamed as Colle
ge of Agricultural Banking. Exchange rate of Rupee was linked to the basket of c
urrencies of major trading partners. Shri N. C. Sengupta was appointed as Govern
or. Shri K. R. Puri was appointed as Governor. Agricultural Refinance Corporatio
n (ARC) was renamed as Agricultural Refinance and Development Corporation (ARDC)
. Regional Rural Banks Act, 1976 received assent of the President. Industrial De
velopment Bank of India delinked from the Reserve Bank. Shri M. Narasimham was a
ppointed as Governor. Dr. I.G. Patel was appointed as Governor. Demonetisation o
f high denomination notes (Rs 1,000, Rs 5,000 and Rs 10,000) effected. Deposit I
nsurance Corporation and Credit Guarantee Corporation of India Ltd. were merged
and renamed as Deposit Insurance and Credit Guarantee Corporation (DICGC). Six m
ore Indian scheduled commercial banks were nationalised. National Bank for Agric
ulture and Rural Development (NABARD) was set up. Dr. Manmohan Singh was appoint
ed as Governor. MICR Clearing was introduced. Release of Sukhomoy Chakravarty Re
port on monetary measurement; Dr. C. Rangarajan (Deputy Governor) Committee Repo
rt on computerisation in banking system.
1969 July 1969 September 1969 September 1969 May 1970 June 1970 January 1971 Dec
ember 1972 September 1973 January 1974 1975 May 1975 August 1975 November 1975 F
ebruary 1976 February 1976 May 1977 December 1977 January 1978 July 1978 April 1
979 July 1982 September 1982 1984

1985 January 1985 February 1985 December 1987 April 1988 July1988 1990 December
1990 1991
The Reserve Bank celebrates its Golden Jubilee Year. The Honourable Prime Minist
er Rajiv Gandhi graced the inaugural function. Shri A. Ghosh was appointed as Go
vernor. Shri R.N. Malhotra was appointed as Governor. Indira Gandhi Institute of
Development and Research was set up. Discount and Finance House of India Ltd. w
as set up, marking the beginning of RBIs role in financial markets. National Hous
ing Bank was set up under the National Housing Bank Act, 1987. Small Industries
Development Bank of India was set up. Shri S. Venkitaramanan was appointed as Go
vernor. Paradigm shift in economic management and the Reserve Bank steps in as t
he facilitator. Support to economic reforms, liberalisation, privatisation, and
globalisation and contributory presence in world bodies. The value of the rupee
was adjusted downwards in two stages, on July 1 and 3, 1991. Two-step downward a
djustment of the rupee in terms of the intervention currency, pound sterling, wo
rked out to 17.38 per cent. Thereafter, the rupee exchange rate was anchored on
a rupee-US dollar rate close to Rs. 26 a dollar. A high-powered Committee on the
Financial System (CFS) was constituted by the Government of India in August 199
1 to examine all aspects relating to the structure, organisation, functions and
procedures of the financial system (Chairman: Shri M. Narasimham). Committee on
the Financial System submitted its report in November 1991, made wide-ranging re
commendations, which formed the basis of financial sector reforms relating to ba
nks, development financial institutions (DFIs) and the capital market in the yea
rs to come. A dual exchange rate system called Liberalised Exchange Rate Managem
ent System (LERMS) introduced. Forex management under deregulated regime led to
a series of measures culminating in FEMA 1999. Dr. C. Rangarajan was appointed a
s Governor. Unified Exchange Rate was introduced. Rupee made convertible on the
Current Account. India attained the status of Article VIII of the Articles of Ag
reement of the IMF. The Reserve Bank and the Government of India signed an agree
ment as per which automatic monetisation of the budget deficit through the issue
of ad-hoc treasury bills would phase out over a period of three years. Board fo
r Financial Supervision constituted as a Committee of the Central Board of Direc
tors. Bharatiya Reserve Bank Note Mudran Limited established as a fully owned su
bsidiary of the Reserve Bank. It commenced printing of notes on June 1 and Decem
ber 11, at Mysore and Salboni, respectively. Banking Ombudsman scheme for redres
sal of customer grievance against the banking sector introduced. The Reserve Ban
k becomes a member of the Bank for International Settlements. Institute for Deve
lopment and Research in Banking Technology, Hyderabad was established by the Res
erve Bank as an autonomous entity.
July 1991
August 1991
November 1991
March 1992
December 1992 1993 August 1994 September 1994 November 1994 February 1995 June 1
995 1996 July 1996

September 1996 April 1997 November 1997 April 1998 December 1998 1999 December 1
999 June 2000 April 2001 March 2002 September 2003 February 2004 November 2004 J
anuary 2006 March 2006 July 2006 2008 September 2008 December 2008 2008/9 April
2009 July 2009 November 2009 2009/10
The Reserve Banks Web site became operational The Reserve Bank and the Government
of India agreed to replace the system of ad-hoc Treasury Bills by Ways and Mean
s Advances, ending automatic monetisation of fiscal deficits. Dr. Bimal Jalan wa
s appointed as Governor. The framework for further strengthening the banking sec
tor was provided by the Committee on Banking Sector Reforms (Chairman: Shri M. N
arasimham) The Monetary Museum Web Site launched. Clean Note Policy introduced for
better currency management. Foreign Exchange Management Act, 1999 replaced FERA
, 1973. FEMA became operational. Clearing Corporation of India was established.
Bharatiya Reserve Bank Note Mudran became private limited company. Dr. Y.V. Redd
y was appointed as Governor. Market Stabilisation Scheme was launched. The Reser
ve Bank Monetary Museum was set up in Mumbai. Revamped Banking Ombudsman Scheme
came into effect. Banking Codes and Standards Board of India constituted. Custom
er Service Department was set up at the Reserve Bank. Payment and Settlements Sy
stem Act, 2007 came into force with effect from August 12, 2008. Cheque truncati
on was introduced in Delhi region as a pilot project. Dr. D. Subbarao was appoin
ted as Governor. Incorporation of National Payment Corporation of India. RBI pur
sued an accommodative monetary policy beginning mid-September 2008 to mitigate t
he adverse impact of the global financial crisis on the economy. The Reserve Ban
k enters its Platinum Jubilee year. The Reserve Bank establishes a new departmen
t Financial Stability Unit. The Reserve Bank purchased 200 mts of gold under IMFs
limited gold sales programme. From October 2009, the RBI began the process of e
xit from the expansionary monetary policy.

Annex - 1
RBI Publications
Annual a)
Annual Report
Trend and Progress of Banking in India
A Profile of Banks
Annual Report on Banking Ombudsman Sche
me, 2007-08
Basic Statistical Returns of Scheduled Commerci
al Banks in India
Branch Banking Statistics
Directory of Commercial Bank Offices in India
k of Monetary Statistics of India
vii) Handbook of Statistics o
n Indian Economy
viii) Manual on Financial and Banking Statisti
Report on Currency and Finance
State Finances : A Study of Budgets
Statistical Tables Rela
ting to Banks in India Half-Yearly
Report on Foreign Excha
nge Reserves Quarterly
Macroeconomic and Monetary Developments
Occasional Papers
Quarterly Stati
stics on Deposits and Credit of Scheduled Commercial
Survey of Professional Forecasters
Variation to Fo
reign Exchange Reserves in India: Sources, Arbitrage and
Costs Monthly
Monetary and Credit Information Review
RBI Bulletin Weekly
Weekly Statistical Supplement

Other Important Publications

Book on External Debt Management: Issues,
Lessons and Preventive
DRG Studies
Handbook of Instructions-Basic Statistical Returns 1 and 2
Handbook of Statistics on State Government Finances
Indias Financial
Sector an Assessment Vol. I to VI 2009
Mint Road Milestones - RBI at 75
Payment Systems in India
Perspectives on Central
Banking Governors Speak ( 1935 to 2010 )
RBI - Note Refund Rules
RBI - Staff Studies
Reports on Currency and Finance - Specia
l Edition
Reserve Bank of India: Functions and Working
The Banking Ombudsman Scheme, 2002
The Banking Ombudsman Scheme, 20
The Reserve Bank of India History 1935 - 1981 ( 3 Volumes )
50 Years of Central Banking - Governors Speak

Annex - 2
List of Abbreviations
American Depository Receipts Available for Sale Adjusted Net Bank Credit Agricul
tural Refinance Corporation Agricultural Refinance and Development Corporation A
utomated Teller Machine Business Correspondent Banking Codes and Standards Board
of India Business Facilitator Board for Financial Supervision Bank for Internat
ional Settlements Banking Ombudsman Balance of Payments Board for Regulation and
Supervision of Payment and Settlement Systems Bharatiya Reserve Bank Note Mudra
n Private Limited Basic Statistical Returns Current Account Convertibility
Capital Adequacy, Asset Quality, Management, Earnings, Liquidity, Systems and Co
Central Accounts Section Core Banking Solution Clearing Corporation of India Lim
ited Central Counter Party Central Depository Services Ltd Credit Equivalent of
Off-Balance Sheet Exposures Centralised Funds Management System Committee on Fin
ancial Sector Plan Cash Management Bill Committee on Procedures and Performance
Audit on Public Services Capital to Risk-Weighted Assets Ratio Cash Reserve Rati
o Customer Service Department Consolidated Sinking Fund Cheque Truncation System

Deposit Accounts Department Department of Banking Operations and Development Dep
artment of Banking Supervision District Consultative Committee District Central
Cooperative Bank Department of Economic Analysis and Policy Deposit Insurance an
d Credit Guarantee Corporation Department of Non-Banking Supervision Department
of Payment and Settlement Systems Department of Statistics and Information Manag
ement Electronic Benefit Transfer External Commercial Borrowings Electronic Clea
ring Service Exchange Earners Foreign Currency Electronic Funds Transfer Export I
mport Bank of India Fuller Capital Account Convertibility Foreign Currency Asset
s Foreign Currency Convertible Bond Foreign Currency Exchangeable Bond Foreign C
urrency Non-Resident (Banks) Foreign Direct Investment Foreign Exchange Manageme
nt Act Foreign Exchange Regulation Act Foreign Institutional Investors Fixed Inc
ome Money Market and Derivatives Association of India Financial Literacy and Cre
dit Counseling Centres Financial Markets Committee Forward Rate Agreements Fisca
l Responsibility and Budget Management Global Depository Receipts Government of
India Guarantee Redemption Fund Government Securities Held for Trading High Powe
r Committee on Urban Cooperative Banks 115


High Speed Reader Sorter Held-to-Maturity High Value Clearing Indian Banks Associ
ation Industrial Credit and Investment Corporation of India Information and Comm
unication Technology Industrial Development Bank of India Internal Debt Manageme
nt Department Indian Depository Receipt Institute for Development and Research i
n Banking Technology Indira Gandhi Institute of Development Research Internation
al Monetary Fund Innovative Perpetual Debt Instruments Interest Rate Swap Joint
Venture Kisan Credit Card Know Your Customer Liquidity Adjustment Facility Liber
alised Exchange Rate Management System Long Term Rural Cooperative Credit Instit
ution MCX Stock Exchange Magnetic Ink Character Recognition Monetary Policy Depa
rtment Micro and Small Enterprise Micro, Small and Medium Enterprises Developmen
t Market Stabilisation Scheme National Bank for Agriculture and Rural Developmen
t Non-Banking Financial Companies Deposit taking NBFC Non-deposit taking NBFC Ne
gotiated Dealing System Negotiated Dealing System Order Matching Net Demand and
Time Liability National Electronic Clearing System National Electronic Funds Tra
nsfer North Eastern Region

Non-Government Organisation Negotiable Instruments Act National Institute of Ban
k Management Net owned Funds Non-Performing Assets National Payments Corporation
of India Non-Resident (External) Rupee Account National Rural Employment Guaran
tee Scheme Non-Resident Indian Non- Resident Ordinary Account National Securitie
s Depository Limited Open Market Operation Off-Site Monitoring and Surveillance
Off-Site Surveillance Over-the-Counter Primary Agricultural Credit Society Publi
c Accounts Department Permanent Account Number Primary Cooperative Agriculture a
nd Rural Development Banks Primary Dealers Association of India Public Debt Offi
ce Public Debt Office - Negotiated Dealing System Primary Dealers Person of Indi
an Origin Payment and Settlement Systems Act Quarterly Discussion Risk Based Sup
ervision Reserve Bank Staff College Resident Foreign Currency Account Resident F
oreign Currency (Domestic) Account Rural Infrastructure Development Fund Regiona
l Rural Banks Real Time Gross Settlement Special Agricultural Credit Plans State
Bank of India State Cooperative Agriculture and Rural Development Banks 117

Special Data Dissemination Standards Special Drawing Rights Securities and Excha
nge Board of India Subsidiary General Ledger Self-Help Groups Systemically Impor
tant Payment System State Level Bankers Committee Statutory Liquidity Ratio Small
and Medium Enterprises Security Printing and Minting Corporation of India Ltd.
Small Scale Industries State Co-operative Bank Technical Advisory Committee Task
Force for Urban Co-operative Banks Treasury Bills Urban Cooperative Banks Unite
d States Dollar Unit Trust of India When Issued Ways and Means Advances Wholly O
wned Subsidiary Zonal Training Centre